Crescent Star Insurance Limited

8/15/2019 Crescent Star Insurance Limited

1/5


2/5

July 9, 20

Management Upda

Having a slice of the steel pie! Decisionunderwrite and inturn hold 37.39% of DSteel Ltd. is indicative of strong future as the higher demand for steel productsindicative of major growth in this sector

Increase use of technology will also be in creating more diverse products andfurthering the awerness of insurance prin Pakistan.

Going into the tracker business through100% ownership of its upcoming trackebusiness. named Crescent Start Track(Private) Ltd. Given the rapid rise in movehicles this sector also shows great pr

Venture into the food business through Chick. Tapping into immense potential in the food industry in Pakistan.

Future Outlook – Business Diversifi cation into High-growth Ventures

Golden Chick: The company plans to invest approximately PKR 70 million in its wholly-owned subsidiary,

Crescent Star Foods (CSF), and is set to bring Texas-based US fried chicken chain, Golden Chick, to Pakistan.

Through CSF the company is expected to offer 7 million ordinary shares at PKR 10/share, and is planning on

retaining 30% shares of the newly owned subsidiary, as per the financials. The first outlet is expected to open by

1QFY16. The initial plan is to open up 3 outlets with an expansion target to 30 within the next 10 years (or donemuch earlier depending upon the growth and returns). Given the high demand for chicken, approximately

864,000 tones, in Pakistan together with KFC being the only major competitor dealing purely in chicken while

offering only fried chicken, the venture seems ideal to target Pakistan’s consumption-driven population with

improving per capita thru soft inflation given weak oil price outlook. Interestingly, the venture is expected to take

up much of the market share based on: i) new brand with expectedly much better service and ambiance than its

competitors to attract young population (under 20s being about 50% of the population), and ii) offering both the

Chicken Roast as well as Chicken Fried ranges, unlike any other chicken brand offerings in Pakistan. Further,

beside Pakistan market, Golden Chick license covering GCC should serve as an edge to CSF, thus capitalizing

huge growth potential in the GCC.

Dost Steels Limited: CSIL will also be the underwriter (3QFY16) of

shares worth up to PKR 450 million of Dost Steels Limited (DSL),

which is expected to be a major market player in the steel industry inthe near future. DSL currently has a plant to manufacture direct

reduced iron, sponge iron, hot briquetted iron, carbon steel, pig iron

and special alloy steel in different forms. The company also has the

ability to manufacture hot rolled high tensile and allied products. DSL’s

major focus is on reinforcement bars (REBARS). It is the largest re-

rolling mills in Pakistan which has the capacity to produce 350,000

tons of high strength rebar annually. Moreover, DSL is in collaboration

with Siemens and Ansaldo, both leading companies in R&D, which

help provide state-of-the-art hot rolling mill plants. DSL’s unique Bar

Quenching technique helps it produce top quality superior products

which will help it stay on top of the market. The project is expected to

be commercially viable by Mar 30, 2016, as per discussion with the

management, since most of the ~PKR 800mn loan-related

restructuring issues have been resolved with the consortium of banks.

CSIL is expected to hold 37.39% of DSL which will help it reap benefits

in the shape of future profits guaranteed by a burgeoning steel

industry. Further, the steel plant is ideally located in the Punjab

province where most of the construction and infrastructure

development activities are taking place while given the initiation on

China-Pakistan Economic Corridor, DSL is expected to have benefit

the most from expected rise in steel demand.

Crescent Star Tracker: With an investment of PKR 25mn, CSIL is expected to hold 100% of its new venture,

Crescent Start Tracker. This venture will help take advantage of the growing transportation sector in Pakistan

resulting in increased demand for trackers and associated devices. The plan is to start from Oct-15, and is

expected to be completed by Sep-16.

Technology Upgrades: Given the rapid use of technology in the insurance sector in 2015,

the company itself is investing huge sums in technology and products to be sold through technology. Use and

advancement in technology will help the company tap into markets for individual clients in the health/travel

sectors and other growing areas of microfinance. It will also help reduce management expenses and increase

front-end and back-end efficiencies, resulting in better business margins. Moreover, through technology more

products will be accessible to the public hence increasing awareness for insurance products.


3/5

July 9, 20

Management Upda

Exhibit: Valuation (Regional/Local Peers Weighted Average)

Multiples P/E (x) DY (%) ROE (%) P/B (x)

Weigh ted Average

Insurance 13.8 1.6 19.8 2.3

Tracking 15.0 0.3 9.2 0.7

Steel 17.3 0.2 3.9 1.6

Food Chains 20.8 3.2 30.4 8.6

Source: Bloomberg, AHL Research

Exhibit: Blended FV

Equity Value(PKR mn)

WeightCSIL

StakeSector

P/EWeighted

P/E Est.Est.

EPS*

Insurance 352.0 39% 100% 13.8 5.4 0.7

Tracking 25.0 3% 100% 15.0 0.4 0.0

Steel ̂ 450.0 50% 37% 17.3 8.7 0.3

Food Chains 70.0 8% 30% 20.8 1.6 0.1

Weigh ted Avg . P/E 897.0 16.1 1.1

Estimated FV (PKR/share) 18.0**

Source: AHL Research, *Based on Estimated Annual Return on Equity for each New Business Venture, ̂ Up to PKR 450mn

**assuming new ventures commence within 1-1.5 years as stated

Value Analysis The Valuation technique used to estimate the expected/indicative/targeted PE multiple for CSIL is ‘Sum of The

Parts’ RoE methodology. The technique in essence makes use of regional and local price earnings multiples to

derive the firm’s expected/estimated/targeted multiple incorporating returns on its various business ventures;

including food, tracking and steel, which are expected to be added in the near future.

For the insurance aspect of CSIL, we made use of a mix of regional and local multiples of the insurance industry.

The resulting benchmark PE multiple attributed for the insurance segment comes out to be 13.8x.

CSIL’s expected tracking business constitutes an investment value of PKR25 million in Crescent Star Tracker

(Private) Limited. With a 100% stake in the company, we derive the company’s EPS conservatively by taking an

estimated average estimated ROE of only 10%. We use a mix of regional and local multiples of companies

capped under USD100mn of the size, to arrive at targeted PE multiple of 15x.

CSIL’s venture in the food business is comprised of an initial investment of PKR70mn in the Texas-based U.S

fried chicken chain, Golden Chick. According to the management, CSIL is expected to hold 30% of this venture

Crescent StarInsurance Ltd-ProductMatrix & Market Share

as of 2014

Fire Property &Damage-Provides

coverage against fire,lightning, explosionsetc. It accounts for3.5% of the totalproduct share

Marine Aviation &Transport-Provides

coverage for goods intransit for both import,

export and inland. Accounts for 9% of

the total productshare.

Motor-Providescoverage againsttheft, accidental

damage etc. Accountsfor56% of the product

share.

Accident & Health-Provides a

comprehensive healthbenefit plan. Accountsfor29% of the product

share.

Others- Includesinsurance against

natural disasters etc. Accounts for 2.5% of

the product share.


4/5

July 9, 20

Management Upda

eventually. The PE multiple of this business can only be driven through regional peer multiples. The resultant

targeted PE for the food business clocks in at a conservative PKR 20.8x.

CSIL’s largest investment of up to PKR450mn is expected to be made in DSL through right issue, with a holding

of 37.4%. For our calculations, we removed anomalies in a list of approximately 200 regional/local steel firms. As

of now, we have made a conservative ROE assumption of only 4% by taking an average of the positive RoEs of

the local and regional companies. The resultant targeted PE multiple for the business stands at 17.3x. Finally, if we take the summation of all the relative portions of the targeted PE multiples, it gives us an

expected/estimated annualized EPS of PKR 1.1 while a targeted multiple of 16.1x for CSIL, resulting in an

indicative FV of PKR 18.0/share, provided all the said business ventures of the company go through smooth as

expected.

Exhibit: Financial highlights

(PKR mn) 1QCY15A 1QCY14A YoY CY14A CY13A YoY CY12 CY11 YoY

Gross Premium 46 21 117% 237 85 179% 68 79 -14%

Net Premium Revenue 86 16 454% 136 56 144% 41 60 -32%

Net Claims 21 3 555% 25 14 79% 12 18 -36%

Management expenses 19 13 42% 69 31 122% 20 20 -2%

Net Commission 18 3 514% 23 4 422% 3 6 -54%

Underwriting Result 29 -4 NM 19 6 212% 7 16 -58%

Investment Income 2 1 307% 7 8 -19% 6 0 1437%

General and other admin exp. 20 11 78% 63 32 99% 31 19 64%

Profit before tax 11 -14 NM -34 2 -NM -18 2 NM

Profit after tax 10 -14 NM -36 1 NM -18 1 NM

EPS (PKR) @ 62mn shares 0.17 (.23) NM (0.58) 0.02 NM (0.29) 0.02 NM

Source: Company Financials, AHL Research

Exhibit: Key Financial Ratios

1QCY15A 1QCY14A YoY CY14A CY13A YoY

Profitability (%)PBT/Net Premium 12.9 (89.5) NM (25.3) 3.7 NM

PAT/Net Premium 11.9 (90.5) NM (26.3) 2.6 NM

Combined Ratio 65.3 265.2 (200) 140.4 121.1 19.4

Management Expenses/Net Premium 21.7 84.6 (62.9) 50.7 55.9 (5.2)

Underwriting Result/Net Premium 33.3 (23.9) NM 14.0 11.0 3.0

Net Claims/Net Premium 24.3 20.6 3.8 18.5 25.3 (6.8)

Investment Income/Net Premium 2.5 3.4 (0.9) 4.9 14.6 (9.7)

Return To Shareholders

ROE- PBT (%) 3.1 (4.0) NM (9.8) 2.3 NM

ROE- PAT (%) 2.8 (4.0) NM (10.2) 1.7 NM

EPS- PKR 0.2 (0.2) NM (0.6) 0.0 NM

P/E Ratio (Times) 55.8 (40.6) NM (16.0) 390.6 NMROCE (%) 2.5 (3.4) NM (8.3) 2.0 NM

ROA (%) 1.8 (2.5) NM (6.2) 0.9 NM

BVPS- PKR 5.8 5.7 0.0 5.7 1.4 3.0

P/BV (x) 1.6 1.6 (0.0) 1.6 6.5 (0.7)

Liquidity/ Leverage

Total Assets Turnover (x) 0.2 0.0 4.7 0.2 0.3 (0.3)

Paid-Up Capital/Total Assets (%) 110.6 107.9 2.8 107.9 73.4 34.5

Debt/Equity (x) 0.0 0.0 (0.1) 0.0 -

Equity/Total Assets (%) 64.7 61.3 3.4 61.3 53.8 7.5

Source: Company Financials, AHL Research


5/5

July 9, 20

Management Upda

About the Company Major Shareholders -2014

Crescent Star Insurance Company Limited (CSI) was formedin 1957 and through its strong underwriting standards hasgained a reputable standing in the insurance industry. CSI is a

registered insurer with the Securities & Exchange Commissionof Pakistan with a paid up capital of PKR 621 million. Thecompany is listed on the Karachi and Lahore StockExchanges. It is also a member of Insurance Association ofPakistan (IAP).

After Restructuring of the company the major shareholdinghas been transferred from the Millwala Company to a group ofindividual sponsors.

Disclaimer: The information contained herein is compiled from sources AHL believes to be reliable, but we do not accept responsibility for its accuracy or completeness. It is not intended

to be an offer or a solicitation to buy or sell any securities. AHL and its officers or employees may or may not have a position in or with respect to the securities mentioned herein and they

do not accept any liability whatsoever for any direct or consequential loss arising from the use of this publication and its contents. AHL may, from time to time, have a consulting

relationship with a company being reported upon. All opinions and estimates contained herein constitute our judgment as of the date mentioned in the report and are subject to change

without notice.

GeneralPublic(Local)29%

Directors &Spouses &Executives-

SakibBerjees

6%

Pak istanReinsuranceCompany

Ltd. (PRCL)

1% AssosciatedCompanies

62%

Others2%

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Crescent Star Insurance Limited