Week Ahead | Tower Insurance

30 June 2021

Global stocks were higher on Friday (S&P 500 index +0.3%) closing out the best week since February. The market has recovered from the hawkish surprise from the FOMC (Federal Open Market Committee) meeting (a week earlier) as investors bet the current level of inflation is only temporary, with the economy well poised to recover from the pandemic.

News that a bipartisan group of senators had reached an agreement on a US infrastructure package was seen by some commentators as supporting the risk-on mood.  The package will include $579bn in new spending and be funded largely via repurposed Covid-19 recovery funds, rather than higher corporate tax rates, as originally proposed by the Democrats. 

Financials were the best performing sector, after the Federal Reserve announced the banking industry could easily withstand a severe recession after performing their annual stress test, with 23 institutions having capital levels were "well above" minimal levels. The decision cleared the way for the banks to raise dividends and buy back more stock, something that was suspended during the pandemic.

Nike Shares surged up +15.5% after reporting earnings and revenue that blew past Wall street estimates, as digital sales jumped +41% from last year and were up +147% from two-years ago.

European stocks were slightly higher on Friday, with the Stoxx 600 index up +0.1%, to close out a winning week amid the prospects of a steady economic recovery, financials and materials reporting gains.

Tower Insurance (TWR:NZX / TWR:ASX)

Tower (TWR) Shares have recently sold off following the Christchurch floods and the related short-term earnings impact. More broadly, the  the stock has been heavily volatile over recent years as it resolves its legacy issues, the major being the Christchurch earthquakes. In our view, TWR has transformed back into a simpler, higher quality business with a stronger capital position and solvency margins.

Looking ahead, we believe the earnings outlook looks favourable from the current juncture as Gross Written Premiums are set to rise as well as the potential for a recovery in investment income for insurance companies after the recent period of extremely low interest rates.

Even during a difficult 2021 financial year, Tower has reintroduced its dividend after a 5-year hiatus which at the current share price is attractive at a 7% dividend yield. This should support its current share price reducing downside risk, assuming Tower are able to maintain their current guided dividend over the medium-term. Being an insurance company (and a relatively small cap), Tower will be prone to adverse events – but the earnings outlook appears positive. Combined with its more robust balance sheet and guided dividend we see an attractive risk reward opportunity as we initiate research coverage on Tower.


Australia & New Zealand Market Movers

The Australian market was stronger on Friday (ASX 200 index +0.4%) as materials and financials led the way.
As covid spreads across Australia causing lockdowns and restrictions, online retailers were strong Kogan leading the way up +6.1%, JB Hi Fi  +1.8%, but gains were selective with Harvey Norman remaining flat.
Woolworth shares slipped further as investors evaluate how to value the company after shedding its Endeavor business, with the latter up +1.3%. 

The New Zealand market was up on Friday (NZX 50 index +0.3%) joining the global recovery following the Fed's interest rate scare.   
A2 Milk shares led the market higher up +2.9%, as it recovers from its heavy sell off. Z energy shares rose +2.3% on unusually large volume, as it noted substantial shareholder L1 Capital, an Australian fund manager, lifted its stake to 6.7%.
Fisher and Paykel fell -1.6% as the Kiwi dollar strengthened, with other exporters also ending the day weaker.


3 Things Markets will be Watching this Week

  1. Key events this week include US monthly nonfarm payrolls data, the latest US ISM Manufacturing print, an inflation CPI print for the Eurozone.
  2. In Australia, covid-19 related developments are back in focus with recent lock downs and heavy restrictions.
  3. In NZ, Sky TV will be holding an Investor Day, and AGM's are scheduled for Argosy and Arvida.
Global stocks were higher on Friday (S&P 500 index +0.3%) closing out the best week since February.

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