TWR - Tower Insurance

[LoungeLizard]

I assume that is the plan. The market capitalisation shouldn't change (well not significantly) after the payout. Actually given they have developed a bit of a habit of paying out surplus cash by way of tax free capital returns, one might even draw some positive inference from this latest payout and re-rate the multiple (which is laughably low ATM)

TWR returned 30m in capital by way of a 1 in 10 cancellation on 9/3/2022 at 72c. However there wasn't a 7c post-return lift in the Sp - it barely budged, and in fact went into decline not long after. Unless I'm missing something, the precedent isn't that good?

[Shareguy]

So we have 12 cps with the cap return if it goes ahead as planed. The market will decide the price so their is risk for sure. Less shares will mean a higher divi per share than before the cap return.

As far as dividend goes Craig's have elected to exclude the cap return from their latest note

Craig's have 10cps FY25E and 12cps FY26
Fbar    have 11.5cps FY25 and 13cps FY26

In a falling interest rate environment it looks good to me, subject to of course when the next major event strikes.

[Basil]

TWR returned 30m in capital by way of a 1 in 10 cancellation on 9/3/2022 at 72c. However there wasn't a 7c post-return lift in the Sp - it barely budged, and in fact went into decline not long after. Unless I'm missing something, the precedent isn't that good?

That's the thing, there's no such thing as free money.
Keeping the maths really simple for the sake of this exercise, suppose there was 100m shares and the share price was $1.18 and it traded at NTA of $1.18 so had $118m of net assets.  After payout of 10% there's 90m shares and $106.2m of assets left and NTA of $1.18 per share so if it still traded at NTA the share price would still be $1.18 but you'd have 10% less shares and some extra money in your bank account, not Tower's bank account.  Money is merely shifted from one bank account to another, there's nothing created here.

Theoretical gains might come with the eps being improved, (but as others have noted there's less cash on hand so interest income will be reduced and further reduced by a declining interest rate market), and also in FY25 the weighted average number of shares on issue during the year will only be about 5% less and a meaningful uplift in eps will only occur in FY26 when 10% lower shares are on issue for the full year.  As others have already noted this is only theoretical as it's on a very low PE already so could just end up on an even lower multiple.  I think people hoping for an early 10% uplift in the share price and the payout to somehow be "free money" are being quite optimistic.  As you suggest, the precedent isn't good.

In my opinion, whether the weather plays ball during the cyclone season is the main factor that will affect the share price in the short to medium term. 
Tower was the top performing company on the NZX this year and the main reason for that was they got lucky with the weather.  Could it happen two years in a row with global warming worsening? 

[Poet]

That's the thing, there's no such thing as free money.
Keeping the maths really simple for the sake of this exercise, suppose there was 100m shares and the share price was $1.18 and it traded at NTA of $1.18 so had $118m of net assets.  After payout of 10% there's 90m shares and $106.2m of assets left and NTA of $1.18 per share so if it still traded at NTA the share price would still be $1.18 but you'd have 10% less shares and some extra money in your bank account, not Tower's bank account.  Money is merely shifted from one bank account to another, there's nothing created here.

Theoretical gains might come with the eps being improved, (but as others have noted there's less cash on hand so interest income will be reduced and further reduced by a declining interest rate market), and also in FY25 the weighted average number of shares on issue during the year will only be about 5% less and a meaningful uplift in eps will only occur in FY26 when 10% lower shares are on issue for the full year.  As others have already noted this is only theoretical as it's on a very low PE already so could just end up on an even lower multiple.  I think people hoping for an early 10% uplift in the share price and the payout to somehow be "free money" are being quite optimistic.  As you suggest, the precedent isn't good.

In my opinion, whether the weather plays ball during the cyclone season is the main factor that will affect the share price in the short to medium term. 
Tower was the top performing company on the NZX this year and the main reason for that was they got lucky with the weather.  Could it happen two years in a row with global warming worsening? 

Hmmm, interesting point but ... surely we aren't valuing the company on its assets - we should be considering its earnings per share. This metric will increase inverse proportionate to the number of shares cancelled. Apart from the earlier mentioned interest earnings being lower we should expect the market capitalisation to stay roughly the same after the share cancellation. Forward EPS outlook, IMO, also shouldn't be based on the weighted average number of shares during the year but rather on the number of shares at the end of the year since this is the number of shares that future earnings will be shared among.
Of course, in practice, anything could happen - markets!!

[winner (n)]

Hmmm, interesting point but ... surely we aren't valuing the company on its assets - we should be considering its earnings per share. This metric will increase inverse proportionate to the number of shares cancelled. Apart from the earlier mentioned interest earnings being lower we should expect the market capitalisation to stay roughly the same after the share cancellation. Forward EPS outlook, IMO, also shouldn't be based on the weighted average number of shares during the year but rather on the number of shares at the end of the year since this is the number of shares that future earnings will be shared among.
Of course, in practice, anything could happen - markets!!

All good in theory about higher eps leading to higher share price etc etc

Lots of research over the years to show that this doesn't often happen .... One school of thought is that post buy back company seen as 'riskier' and given a slightly lower PE

But Tower might be OK

[winner (n)]

Poet ...look at the SKT chart from mid 2022

Cap return $2.20 in November and share price dipped thst week but notice share price now is much the same as pre cap return ....and there's been a share buy back since.

Earnings have been bit fast but no rerate has occurred

[Basil]

So there's $45m less on term deposit and a typical term deposit was paying circa 6% a few months ago but all their term deposits might only be paying 3-3.5% this time next year.  Combining those two factors, is there likely to be much uplift in FY26 eps at all ?  (I don't know as I haven't tried to crunch the numbers)

[LoungeLizard]

The post-return rerate seems to be a bit of a lottery to me. No-one should expect free money, but they shouldn't be worse off either. That doesn't always seem to be the case.
However TWR are in a stronger position now than before and barring a catastrophic weather year (so far so good) it could well be another bumper year and a re-rating may be on the cards anyway, particularly if dividends increase as predicted.   

[Poet]

Poet ...look at the SKT chart from mid 2022

Cap return $2.20 in November and share price dipped thst week but notice share price now is much the same as pre cap return ....and there's been a share buy back since.

Earnings have been bit fast but no rerate has occurred

Yes, good observation Winner. But if TWR earnings are as projected and share numbers are down 10%, you would expect sp to lift. But there's no accounting for markets and their sentiments. I'm hanging on to my shares though and TBH happy to be getting a cashflow by way of the capital return. I guess that Bain feels the same way.

[Basil]

If I get time tomorrow I will try and crunch some numbers around the question I posed in my last post. I think the real gain in eps after those factors I mentioned will be pretty disappointing.
High risk cyclone season is only just over a month away from starting.

[Poet]

So there's $45m less on term deposit and a typical term deposit was paying circa 6% a few months ago but all their term deposits might only be paying 3-3.5% this time next year.  Combining those two factors, is there likely to be much uplift in FY26 eps at all ?  (I don't know as I haven't tried to crunch the numbers)

Their NPAT profit guidance is $50-$60 million with a $50m large events allowance (and that is already accounting for the share cancellation) Large events to date, with the first quarter almost over are $2.5M, so let's say $10m annualised. At this rate then NPAT for this year will be $55m plus $30m = $85m On the reduced share volume of 341m shares, that's NPAT of $0.25 per share (or a PE of 5.28 at current share price $1.34)

[Basil]

Annualising a very low risk period of the year for extreme weather events seems like a very unwise thing to do.

Once we are through the high risk cyclone season, say by early May, annualising the extent of weather events so far, would be an appropriate approach for FY25.

Forgetting about any possible underutilisation of provisioning for extreme weather event's in future years seems like an appropriate way to value TWR to me on long run earnings.   Doing that the PE is 8.3 which is okay for a no growth company. Can they grow earnings in the years ahead with ever increasing problems from climate change is the real question for which I would suggest, there is no answer.
 
I have looked at Tower as a hold for dividend income to offset insurance costs. Analyst forecasts are one thing but Tower's very poor history with dividends excludes it from my considerations as a reliable income earner.

[Left Field]

TWR is a definite hold for me providing useful 'financial sector' coverage in a well balanced portfolio.

In the last 12 months capital gains have been over 120% so average SP holding cost is well below today's SP and provides good risk mitigation.  Dividends a further 2% bonus.

When first purchased TWR was 5% of my portfolio (to mitigate risk) but quickly grew to be 15 %. When the SP reached over $1.40 I sold 25% of my holding and now plan to keep TWR at circa 10% of my portfolio.

Current PE of 6.8 is relatively conservative (as befits some risk.) For comparison IAG trades at a 22 PE. Sun insurance 19 PE.  IMO there is a strong likelihood of further strong SP appreciation in 2025 but make no predictions.

As another bonus, yesterday's buyback announcement will more than pay my ALL annual 2025 insurance costs.

[Basil]

Fair enough. FWIW at one stage I held enough TWR to pay annual insurance from forecast regular dividends several times over and did consider keeping enough as a hedge to eliminate insurance costs going forward but there is no escaping the truth of their very poor dividend history.

The other thing is stocks going into the NZX 50 have a strong propensity to underperform the index in the subsequent 12 months. Maybe Tower will be an exception to that norm. Time will tell but my focus is on stocks that have earned my trust that they can be depended on for retirement income .

I caution that you should take with a grain of salt, brokers dividend forecasts and look at the very poor history over the last 10 years.

I  hope we have fabulous summer weather and there's no repeat of the weather horrors of 2023.

[winner (n)]

.........

I  hope we have fabulous summer weather and there's no repeat of the weather horrors of 2023.

Fabulous summer weather ...hot and dry and windy in South Island equals fires

Didn't Lake Ohau fire cost Tower best part of $10m a couple of years ago?

S