One company I think worthy of a closer look at today's prices is Australia's only listed Lenders Mortgage Insurance (LMI) provider, Genworth Mortgage Insurance Australia (ASX: GMA). I'm a little late to the party on this one, with Genworth shares up 20% since November, but the company still appears worthy of closer investigation.
Buying a dollar for 80 cents
First, it's trading at a discount to its Net Tangible Assets (NTA). This means that once you subtract the debt, claim expenses, and other liabilities from total assets, you're left with $3.97 per share in NTA as of 30 June 2016. This means you're getting $3.97 worth of 'stuff' (predominantly bond investments) for every $3.38 share that you buy. Straight away, this is a sign that we should get interested.
That asset value also excludes whatever Genworth's business might earn in profits or losses over the next few years, and recently Genworth has been quite profitable. Now, part of the reason the company is marked down is probably because of its exposure to the housing market. With lenders and the regulators cracking down on high LVR and low-doc loans recently, there could be a hit to demand for Lenders' Mortgage Insurance (LMI) – Genworth's key product – over the next year or two. That's fine, given that we're getting the business for less than the price of its assets.
What's potentially not fine is the way that upsets to the housing market or changes to interest rates could affect Genworth's value. Would-be bargain seekers should consider:
- How the company has been pricing risk. Genworth uses its past experience to evaluate likelihood and cost of loan delinquencies. Unfortunately, most of its past experience in Australia is in a low interest rate environment. Genworth has recently re-evaluated several of its key assumptions, but still there is a risk that the company's models rely too much on the past – potentially creating problems if we are heading into a period of higher interest rates and higher delinquencies in the near term
- How interest rates affect the company's $3.6 billion investment portfolio. Approximately 60% of this is in corporate bonds and 20% in government bonds, with different rate benchmarks
- How higher interest rates and other events like rising unemployment affect the likelihood of delinquency on loans
- The potential downside of a downturn in the housing market, particularly with regard to a) possible higher delinquencies and b) lower LMI sales
- What would inspire the market to revalue the company at a price equal to or greater than its Net Tangible Assets? If a housing downturn eventuates, shares could plunge and stay down for a long time.
There are a few other things to consider such as the company's structure, with 52% of shares held by its US parent company, and the long 'tail' on earnings, given that Genworth earns its LMI premiums over a 10-year period. The company definitely appears worthy of closer investigation today, however.
