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Is There An Opportunity With Sampo Oyj’s (HEL:SAMPO) Mispricing?

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Pricing insurance stocks such as SAMPO is particularly challenging. Given that these companies adhere to a different set of rules relative to other companies, their cash flows should also be valued differently. Industry-specific factors, such as gross written premiums are crucial in understanding how insurance companies make money. Emphasizing data points such as book values, in addition to the return and cost of equity, is useful for evaluating SAMPO’s intrinsic value. Today I will take you through how to value SAMPO in a fairly useful and easy approach.

Check out our latest analysis for Sampo Oyj

Why Excess Return Model?

Two main things that set financial stocks apart from the rest are regulation and asset composition. Finland’s financial regulatory environment is relatively strict. In addition, insurance companies usually do not hold substantial amounts 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.

HLSE:SAMPO Intrinsic Value Export November 6th 18
HLSE:SAMPO Intrinsic Value Export November 6th 18

Deriving SAMPO’s Intrinsic Value

The main assumption for this model 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)

= (0.14% – 8.2%) x €23.52 = €1.3

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)

= €1.3 / (8.2% – 0.8%) = €17.65

Putting this all together, we get the value of SAMPO’s share:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= €23.52 + €17.65 = €41.18

This results in an intrinsic value of €41.18. Given SAMPO’s current share price of €40.62, SAMPO is currently trading in-line with its true value. This means SAMPO isn’t an attractive buy right now. Valuation is only one side of the coin when you’re looking to invest, or sell, SAMPO. Analyzing fundamental factors are equally important when it comes to determining if SAMPO has a place in your holdings.

Next Steps:

For insurance companies, there are three key aspects you should look at:

  1. 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.

  2. Future earnings: What does the market think of SAMPO going forward? Our analyst growth expectation chart helps visualize SAMPO’s growth potential over the upcoming years.

  3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether SAMPO is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on SAMPO here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.