PZU operates in the insurance industry, which has characteristics that make it unique compared to other sectors. Understanding these differences is crucial when it comes to putting a value on the insurance stock. Industry-specific factors, such as gross written premiums are crucial in understanding how insurance companies make money. Examining elements like book values, along with the return and cost of equity, can be useful for computing PZU’s valuation. Below we will look at how to value PZU in a reasonably accurate and uncomplicated approach. See our latest analysis for Powszechny Zaklad Ubezpieczen Spólka Akcyjna
What Model Should You Use?
Two main things that set financial stocks apart from the rest are regulation and asset composition. Poland’s financial regulatory environment is relatively strict. In addition to this, insurance companies tend to not have substantial portions of tangible assets on their books. Excess Returns overcome some of these issues. Firstly, it doesn’t focus on factors such as capex and depreciation – relevant for tangible asset firms – but rather emphasize forecasting stable earnings and book values.
Deriving PZU’s True Value
The key assumption for Excess Returns is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns above the cost of equity is known as excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (20.92% – 8.67%) x PLN20.02 = PLN2.45
We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= PLN2.45 / (8.67% – 3.33%) = PLN45.96
Putting this all together, we get the value of PZU’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= PLN20.02 + PLN45.96 = PLN65.98
This results in an intrinsic value of PLN65.98. Relative to the present share price of zł38.26, PZU is priced beneath its true value. This means you can buy PZU at a discount to its value of PLN65.98. Valuation is only one part of your investment analysis for whether to buy or sell PZU. Fundamental factors are key to determining if PZU fits with the rest of your portfolio holdings.
For insurance companies, there are three key aspects you should look at:
- Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
- Future earnings: What does the market think of PZU going forward? Our analyst growth expectation chart helps visualize PZU’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether PZU is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on PZU here.