British American Investments Company – Kenya (BRITAM) has made investors very happy this year. The stock is among the Nairobi Securities Exchange’s best performers, posting a dazzling 94.7% return.
Now the shares trade a shade below 2.5x their book value. Is that too rich a price? Or is there some upside left?
In order to answer that question let’s begin by taking a closer look at the business and how it makes money.
Insuring East Africa
While it does operate a small asset management business, Britam Kenya is, first and foremost, an insurance company. It sells everything from life insurance to fire, marine, and medical policies. Kenya is its primary market, but it also operates in Uganda, South Sudan, Rwanda, and Malawi. Over the past five years, the company has grown its net premium revenue at a 22.7% clip.
Like all insurance companies, it invests the cash that it receives from customers until it needs to pay it out in the form of claims or other expenses. This investment capital is known as float, and it’s where the real magic happens.
Britam invests its float in a combination of real estate, government securities, and stocks. It also owns a 21% stake in Housing Finance Company of Kenya (HFCK).
When these investments perform well, Britam becomes the virtual equivalent of a cash machine. Such has been the case over the past 12 months. After accounting for the change in fair value of all the company’s property and equity investments, the company generated comprehensive income of Ksh3.48 per share. That’s a 30.1% increase over the prior 12-month period.
Value Check on Britam Kenya
One way that I quickly assess the value of a stock is to imagine that the underlying company suddenly stops growing. Forever.
What’s the most that I would be willing to pay for a stock if it continued to generate the same level of earnings per share in perpetuity?
In such a case, the stock’s earnings can be viewed very much like the interest payment on a long-term bond.
The stock’s earnings should “yield” as much as a long-term bond would. Otherwise, there’d be no point for me to buy the stock. Thus, the prevailing long-term bond rate is my required rate of return.
To illustrate, let’s assume that Britam’s growth stagnates. Year after year for the foreseeable future, it averages comprehensive income of Ksh3.48 per share.
To find out how much such performance would be worth, we can simply divide the annual earnings (Ksh3.48 per share) by Kenya’s 10-year bond rate, which currently hovers around 12%.
If we do so, we arrive at a value of Ksh29.00 per share.
Kshs3.48 / 0.12 = Ksh29.00
So, in the event that Britam’s earnings froze at current levels, investors who buy at a price of Ksh29.00 per share would realize a 12% annual return.
Priced for Stagnation
How does this calculated value compare to the current price of the shares on the Nairobi Securities Exchange?
Well, as of this writing, you can buy Britam for Ksh29.50 per stub. Interesting, huh? So, essentially, Britam is priced for zero earnings growth in perpetuity.
I’ll gladly take that bet.
Even if the company’s earnings were exceptionally high over the past 12 months, I’m guessing Britam, with its steadily rising premium income and a large investment portfolio (which it could simply invest at a 12% rate of return if it chose to), will find ways to grow earnings over the long-term.
Thus, for patient investors, the shares appear to offer value — even after nearly doubling in price over the past ten months.
What Do You Think?
I’d love to hear your thoughts on Britam Kenya. Am I too enthusiastic about its prospects? Or do you agree that it looks like a bargain? Share your take in the comments!