Underperforming QBE Insurance Group Ltd (ASX: QBE) may need to take a leaf out of the big banks’ playbook if it wants to turnaround its sagging share price.
That may sound like a contradiction given how Commonwealth Bank of Australia (ASX: CBA) and friends haven’t been performing much better but that’s driven by factors that applicable to QBE.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has gained around 1% over the same period – leaving plenty of room for QBE to play catch-up when buyers return to the stock.
But that’s the issue. There’s nothing to get investors excited about the stock in the near-term and bargain hunters will prefer to sit on the sidelines.
How QBE could trigger a rebound in its share price is to spin-off assets. Companies that have undertaken divestments have generated a good amount of buzz among investors. Recent examples of companies shedding assets (or planning to shed assets) include BHP Billiton Limited (ASX: BHP) selling its shale oil assets, Wesfarmers Ltd (ASX: WES) spinning-off Coles and three of the four big banks that include CBA, Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) shedding their wealth/investment divisions.
QBE will likely receive a positive reception from such a move too with Macquarie Group Ltd (ASX: MQG) questioning if the acquisitive group has become too diversified to a point that the business lacks scale.
“We have analysed QBE’s expenses vs. peers and conclude a lack of scale in Europe and the US is the reason for a higher underwriting expense ratio vs. peers,” said the broker.
“With balance sheet constraints, we believe divestments are required to redeploy capital and achieve scale in these core markets.”
What this also means is that management’s cost cutting program probably won’t be enough to spark a market re-rating in its share price and Macquarie calls the cost-out strategy a “band aid” solution.
QBE had undertaken a cost-out program in 2015 and was only able to achieve pretty modest improvements in the business.
The insurer currently lacks the financial muscle to build scale in its core business and it could use the proceeds of sale of non-core assets to beef up its operations in areas that count.
Sometimes you have to shrink to grow.
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Insurance Australia Group Limited, Macquarie Group Limited, and National Australia Bank Limited. The Motley Fool Australia owns shares of Insurance Australia Group Limited and National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.