The QBE Insurance Group Ltd (ASX: QBE) share price is pushing higher in morning trade on Tuesday.
At the time of writing the insurance giant's shares are up over 2% to $9.62.
Despite now trading 35% higher than its March low, the QBE share price is still down a sizeable 37% from its 52-week high.
Is the QBE share price in the buy zone?
One broker that sees the weakness in the QBE share price in 2020 as a buying opportunity is Goldman Sachs.
Earlier today the broker added the company to its conviction buy list with a price target of $11.26.
This price target implies potential upside of 17% for QBE's shares over the next 12 months. This potential return stretches to over 22% if you include its estimated dividends for FY 2021 of 52 cents per share.
Why is Goldman Sachs bullish on QBE?
According to the note, the broker believes there are two medium-term opportunities for QBE that could generate value for investors.
The first is upside from putting (potential) excess capital to work, whereas the other is margin expansion from operating leverage.
In respect to its excess capital, Goldman Sachs sees ~US$100 million+ upside to its net profit after tax if QBE were to move back to its target prescribed capital amount (PCA) range.
The broker commented: "We estimate QBE is likely to report a PCA ratio around 1.9x in FY20 following the completion of its capital plan, plus what we forecast to be a small loss for the year."
"[…] intentions behind the capital actions taken in the early days of the pandemic were a mix of fortifying the balance sheet ahead of potential COVID-19 related headwinds [and] boosting flexibility to capitalise on any dislocation in the industry."
However, it notes that risks around the balance sheet are now receding meaningfully. As a result, the broker expects QBE to be "left with adequate flexibility to explore both selective growth and investment portfolio repositioning."
"We expect QBE could achieve c.US$100m+ in incremental NPAT if it felt comfortable to return toward a PCA ratio closer to the mid-point of its 1.6-1.8x target range," it explained.
Margin expansion.
The broker also believes that the pandemic is unlikely to derail the solid momentum of QBE's efficiency program.
Combined with a positive premium mix and its belief that it is well-placed to weather hardening reinsurance rates, Goldman sees scope for ~1.2%+ margin expansion from operating leverage through to FY 2021.
Should you invest?
While I'm not a big fan of QBE, I do think Goldman Sachs makes some great points and it could be worth considering at the current level. Especially for income investors given its estimated 5%+ yield in FY 2021.
