Guardian Holdings Limited | Equity Analysis

To value GHL we opted to utilize a multi-stage residual income model for multiple reasons. These included our belief that there is only a small pool of comparable listed stocks from which to utilize a multiples-based approach, as well as that the dividend payout tends to be unstable, therefore, we decided against a dividend discount model. The residual income model essentially looks at the returns on shareholder equity that the company is projected to make above and beyond its cost of equity (i.e. its residual income). This residual income is then discounted and added to the current book value to arrive at a valuation.

In doing our residual income model, we projected all 3 statements for GHL 5 years ahead. Key assumptions that were used in our model include continued gross premium growth which is below trend growth, before rising incrementally as the industry recovers to a long-term growth rate of 5.0% in line with a blended average nominal rate of GDP growth in Trinidad and Jamaica, an increased reinsurance rate (which is expected at the very least in the short term) and some normalization of the actuarial reserve releases going forward (i.e assuming excessively large releases from actuarial reserves are tempered in the long run). These assumptions culminated in our forecast of $5.5 billion in net premiums in 2023 and $6.6 billion by 2027.

This compares to net premiums of $5.4 billion for December 2022. Regarding our capital market assumptions, our baseline assumption is for mild positive returns in global bond markets (5% return in 2023) and a more conservative negative return for equities (-3%) before returning to a yearly return in line with global nominal GDP growth, approximately 6.5% by 2027. In building our residual income model, we made adjustments to allow for clean surplus accounting. That is, we categorize fair value changes in other comprehensive income as profits, i.e utilizing total comprehensive income (TCI). Based on our forecasts we are expecting TCI of $1.3 billion in 2023 aided by increased bond returns. Other key model-specific assumptions include a cost of equity of 14.15% derived from a build-up methodology, as well as an expectation that in the long run, the group’s ROE will match the cost of equity leading to no long-run residual income. Based on all these combined assumptions we arrived at a fair value of approximately J$574.31/TT$25.81 which represents a potential upside of approximately 16.8%/2.0% based on the closing price on the JSE/TTSE of J$491.63/TT$25.31 as of March 31, 2023. Therefore, we assigned an OVERWEIGHT rating on GHL shares listed on the JSE and a MARKETWEIGHT rating on the shares listed on the Trinidad stock exchange.