Helios Underwriting — Strong share price on supportive fundamentals

Helios Underwriting (AIM: HUW)

Last close As at 22/05/2024

GBP1.68

−0.50 (−0.30%)

Market capitalisation

GBP128m

More on this equity

Research: Financials

Helios Underwriting — Strong share price on supportive fundamentals

On 22 March, Helios Underwriting reported NAV for 31 December 2023 of 185p/share. This is broadly in line with our expectations and has not affected the forecasts in our update note published on 16 January. We maintain our valuation of 280p/share, which is at a 51% premium to the 31 December 2023 NAV. Since our last publication, Helios’s share price has risen by 22% (up 33% in the last month). This strong performance is well supported by the underlying fundamentals and outlook (as highlighted in our research) and was delivered despite the conclusion of Helios’s share buyback in January. Share overhang pressure appears to have subsided, although one of Helios’s key shareholders, Hudson Structured Capital Management (HSCM), may still be a natural seller of Helios shares due to internal issues.

Marius Strydom

Written by

Marius Strydom

Analyst

Financials

Helios Underwriting

Strong share price on supportive fundamentals

31 December 2023
NAV update

Insurance

4 April 2024

Price

180p

Market cap

£135m

Net cash (£m) at 30 June 2023

13.2

Shares in issue

74.8m

Free float

46.4%

Code

HUW

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

30.9

20.7

9.5

Rel (local)

27.0

17.1

5.7

52-week high/low

183p

115p

Business description

Helios Underwriting was established in 2007 (as Hampden Underwriting), primarily to provide investors with a limited liability direct investment into the Lloyd’s insurance market. It is an AIM-quoted holding company, providing underwriting exposure across a diversified portfolio of selected Lloyd’s syndicates.

Next events

FY23 earnings release

May 2024

Analyst

Marius Strydom

+44 (0)20 3077 5700

Helios Underwriting is a research client of Edison Investment Research Limited

On 22 March, Helios Underwriting reported NAV for 31 December 2023 of 185p/share. This is broadly in line with our expectations and has not affected the forecasts in our update note published on 16 January. We maintain our valuation of 280p/share, which is at a 51% premium to the 31 December 2023 NAV. Since our last publication, Helios’s share price has risen by 22% (up 33% in the last month). This strong performance is well supported by the underlying fundamentals and outlook (as highlighted in our research) and was delivered despite the conclusion of Helios’s share buyback in January. Share overhang pressure appears to have subsided, although one of Helios’s key shareholders, Hudson Structured Capital Management (HSCM), may still be a natural seller of Helios shares due to internal issues.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

148.3

(5.2)

(4.9)

3.0

N/A

1.7

12/23e

213.0

14.9

14.7

6.0

12.2

3.3

12/24e

332.1

25.8

26.2

12.8

6.9

7.1

12/25e

441.9

37.0

37.6

18.4

4.8

10.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

9p/share NAV increase in Q423

Helios reported a 9p/share increase in its Q423 NAV to 185p/share at 31 December 2023, which is broadly in line with our expectation of 187p/share. This increase was supported by profitable underwriting and investment income, as well as a meaningful increase in underwriting capacity (as highlighted in our previous research). Our forecasts and our valuation of 280p/share remain unchanged.

33% share price increase over the last month

Helios’s share price has increased by 33% in the last month from 135.5p/share to 180p/share (up 22% from our previous research), despite the conclusion of its buyback programme in January. This rise is well supported by fundamentals and was delayed, in our opinion, as a result of share overhangs, initially from Odey Asset Management in 2023 and then from HSCM during the latter part of 2023 and into 2024 (a forced sell-off from c 12.5m shares to c 9.3m shares over 2023, likely predicated by the failure of one of HSCM’s key investments, Florida-based Southern Fidelity Insurance Company). Despite the recent respite, we note that HSCM could remain a natural seller of its remaining c 12% stake in Helios, which could create opportunities for new investors in the company.

Valuation: Maintained at 280p/share

Helios’s NAV update supports our forecasts and valuation of 280p/share. Our valuation is at a 51% premium to the updated 31 December 2023 NAV of 185p/share and at a 56% premium to the current share price. Our valuation is supported by our forecast return on NAV (RONAV) of 13.6% in FY24 and 16.7% in FY25.

Fundamentals are very supportive

In our 16 January 2024 note, we discussed numerous positive and supportive tailwinds for Helios. These included:

a 61% increase in FY24 expected underwriting capacity to £501.8m versus 30 June 2023;

a 62% year-on-year increase in retained capacity to £387m;

Helios introducing an innovative mechanism to ‘rent’ up to £55m of its £501.8m FY24 capacity to other third parties under a new ‘rental capacity’ initiative with Argenta Private Capital;

the execution of a material share buyback programme (2.3m shares at an average price of 143p/share during 2023); and

an increase in its annual base dividend from 3p to 6p to be paid in 2024, with this doubling of the base dividend potentially further supplemented by special dividends.

Since the end of 2023, Helios has concluded its share buyback programme by purchasing a further 0.8m shares at an average share price of 150p/share. In addition, on 22 March it reported NAV for 31 December 2023 of 185p/share. This is broadly in line with our expectation of 187p/share and has not affected the forecasts published in our last update note.

Valuation: An over-the-cycle return approach

Our base case valuation of 280p/share uses a 14.6% over-the-cycle RONAV, which is in line with our previous research. Due to the published capacity fund revaluations and uplift in 30 September 2023 NAV, we previously lifted our year-end NAV forecast from 170.5p/share to 187p/share, which is broadly in line with the 185p/share reported on 22 March 2024.

Exhibit 1: Current valuation

FY22

FY23e

FY24e

FY25e

Over the cycle valuation (p)

280 

 

 

 

EPS (p)

(4.9)

14.7

26.2

37.6

DPS (p)

3.0

6.0

12.8

18.4

NAV/share (p)

151.8

187.1

217.4

254.0

Valuation-implied P/E (x)

N/A

19.0

10.7

7.5

Valuation-implied dividend yield (%)

1.1

2.1

4.6

6.5

NAV multiple (x)

1.82

1.48

1.28

1.10

Source: Helios Underwriting, Edison Investment Research

Our fair value for Helios is at a 56% premium to the current share price. While it is reasonably supported by expected FY23 EPS (P/E of 19x) and modestly so by dividends (2.1% dividend yield), the valuation quickly moves into very attractive territory on a forward basis, with the P/E multiple falling to 7.5x in FY25 and the dividend yield rising to 6.5%.

Financials

Our financial forecasts are unchanged from our previous research but are included below for completeness. We reiterate the impressive 77.7% increase we forecast for FY24 EPS, followed by a further 42.2% growth forecast for FY25. In both cases, this is a factor of healthy forecast underwriting performance (combined ratios below 90%), supported by growing reinsurance income and investment income. These strong forecasts drive our healthy RONAV forecasts of 13.6% in FY24 and 16.7% in FY25. The healthy outlook demonstrated in the exhibits below provides strong support for our 280p/share valuation.

Exhibit 2: Helios’s segmental forecasts and key metrics

£m

FY21

FY22

FY23e

FY24e

FY25e

Capacity (for deployment in the next year)

232.8

296.6

449.8#

557.8

624.7

Capacity added through acquisitions

34.9

5.7

7.4

9.0

11.2

Capacity added through pre-emptions

6.1

36.0

14.7

27.0

33.5

Tenancy capacity added

58.0

38.9

124.6#

72.0

22.3

Retained capacity

171.2

238.3

328.3#

379.2

406.0

Key parent company assets

FAL (required capital)

43.6

73.8

64.2##

90.5

118.2

WAV (intangible assets)

59.8

60.0

82.4

95.4

111.6

Free working capital

16.2

10.5

52.3

36.6

20.4

Key syndicate assets

Insurance assets

110.3

152.2

294.3

444.0

574.0

Equity (members' balances at Lloyd's)

(3.5)

(5.1)

6.7

12.3

19.9

Group NAV (syndicate plus parent equity)

46.6

55.7

56.0

65.0

75.9

Syndicate level results*

GWP

134.6

250.9

327.6

477.0

605.9

Net earned premiums

92.7

156.6

216.6

335.4

448.9

Claims

(54.1)

(96.8)

(119.1)

(185.8)

(249.8)

Expenses

(32.9)

(54.2)

(75.8)

(115.8)

(151.6)

Underwriting result

5.7

5.6

21.7

33.8

47.5

Investment income on financial assets

0.0

(3.5)

8.9

13.4

17.9

Quota share reinsurance

(2.3)

(2.0)

(8.3)

(9.7)

(14.9)

Underwriting Operating result

3.4

0.1

22.4

37.5

50.5

Parent level results

Reinsurance income**

0.2

0.6

1.2

2.5

3.4

Investment income on FAL

1.2

0.6

1.8

5.1

5.7

Stop loss costs

(1.9)

(1.3)

(4.2)

(7.4)

(10.3)

Operating costs***

(3.6)

(5.2)

(5.9)

(10.6)

(10.8)

Pre-acquisition impact

(0.1)

(0.0)

(0.5)

(1.3)

(1.6)

Combined pre-tax profit

(0.6)

(5.2)

14.9

25.8

37.0

Tax

0.2

1.9

(3.7)

(6.5)

(9.2)

Profit after tax

(0.4)

(3.3)

11.2

19.4

27.7

WAV revaluation after tax

5.4

2.0

13.9

7.1

8.8

Total comprehensive income

4.9

(1.3)

25.0

26.4

36.5

NAV/share (p)

157.0

151.8

187.1

217.4

254.0

WAV/share (p)

88.2

78.7

111.4

129.3

151.2

EPS (p)

(0.8)

(4.9)

14.7

26.2

37.6

DPS (p)

3.0

3.0

6.0

12.8

18.4

Capacity growth

110.9%

27.4%

51.7%

24.0%

12.0%

EPS growth

(147.3%)

546.7%

(403.0%)

77.7%

43.3%

RONAV/share

(0.5%)

(3.1%)

9.4%

13.6%

16.7%

RONAV/share plus WAV revaluations

5.5%

(1.2%)

25.0%

19.2%

22.6%

Group insurance ratios****

Claims ratio

64.5%

63.7%

58.4%

58.5%

59.1%

Expense ratio

43.3%

40.9%

42.1%

42.2%

40.2%

Combined ratio

107.8%

104.6%

100.5%

100.7%

99.3%

Underwriting portfolio insurance ratios*****

Claims ratio

58.4%

61.8%

55.0%

55.4%

55.6%

Expense ratio

35.5%

34.6%

35.0%

34.5%

33.8%

Combined ratio

93.9%

96.4%

90.0%

89.9%

89.4%

RoC (closed YOA)

3.3%

3.6%

6.3%

14.3%

16.0%

Year 3 (accounting year)

6.1%

3.9%

5.8%

9.2%

7.5%

Year 2 (previous year)

1.3%

4.4%

4.6%

9.1%

8.8%

Year 1 (underwriting year)

(4.2%)

(4.6%)

(4.0%)

(4.0%)

(0.3%)

Source: Helios Underwriting accounts, Edison Investment Research. Notes: *Syndicate results before pre-acquisition/other parent items and after QS. **QS and ‘rental capacity’ fees and profit commission. ***Including finance costs. ****Using consolidated premiums (after pre-acquisition impact) and including parent items. *****Using syndicate excluding pre-acquisitions and parent impacts. Syndicate revenue higher than consolidated revenue, but so are claims and expenses (pre-acquisition impact). #Assumes £52m of tenancy capacity only active in H124 (reduced contribution to FY24 UW results and capital requirements). ##Allows for FAL deferral and elevated syndicate solvency credits.

Exhibit 3: Financial summary

2022

2023e

2024e

2025e

Accounts: IFRS, year-end 31 December, £’000s

PROFIT & LOSS

Revenue*

148,345

212,958

332,089

441,885

Net insurance claims and loss adjustment expenses

(149,667)

(193,975)

(298,865)

(397,328)

Gross Profit

(1,322)

18,984

33,223

44,557

EBITDA

(5,169)

14,872

25,816

36,996

Operating profit (before amort. and excepts.)

(5,169)

14,872

25,816

36,996

Intangible Amortisation

0

0

0

0

Exceptionals

0

0

0

0

Other

(3,847)

(4,111)

(7,407)

(7,561)

Operating Profit

(5,169)

14,872

25,816

36,996

Net Interest

0

0

0

0

Profit Before Tax (norm)

(5,169)

14,872

25,816

36,996

Profit Before Tax (FRS 3)

(5,169)

14,872

25,816

36,996

Tax

1,852

(3,718)

(6,454)

(9,249)

Profit After Tax (norm)

(3,317)

11,154

19,362

27,747

Profit After Tax (FRS 3)

(3,317)

11,154

19,362

27,747

Average Number of Shares Outstanding (m)

72.0

75.1

73.9

73.8

EPS - normalised (p)

(4.9)

14.7

26.2

37.6

EPS - normalised fully diluted (p)

(4.9)

14.5

25.7

36.7

EPS - (IFRS) (p)

(4.9)

14.5

25.7

36.7

Dividend per share (p)

3.0

6.0

12.8

18.4

Gross Margin (%)

(0.9%)

8.9%

10.0%

10.1%

EBITDA Margin (%)

(3.5%)

7.0%

7.8%

8.4%

Operating Margin (before GW and except.) (%)

(3.5%)

7.0%

7.8%

8.4%

BALANCE SHEET

Fixed Assets

567,249

767,015

1,115,996

1,445,049

Intangible Assets

61,434

83,852

96,900

113,079

Tangible Assets

279,803

324,684

484,597

639,777

Investments

226,012

358,479

534,498

692,193

Current Assets

25,300

77,910

71,300

59,714

Stocks

0

0

0

0

Debtors

0

0

0

0

Cash

25,300

77,910

71,300

59,714

Other

0

0

0

0

Current Liabilities

22,488

8,237

9,060

9,967

Creditors

7,488

8,237

9,060

9,967

Short term borrowings

15,000

0

0

0

Long Term Liabilities

452,883

696,793

1,016,330

1,305,834

Long term borrowings

0

60,000

60,000

60,000

Other long-term liabilities

452,883

636,793

956,330

1,245,834

Net Assets

117,178

139,896

161,905

188,963

CASH FLOW

Operating Cash Flow

(24,798)

13,088

11,661

16,289

Net Interest

(2,870)

(6,119)

(12,202)

(16,870)

Tax

(166)

(3,718)

(6,454)

(9,249)

Capex

(696)

(392)

0

0

Acquisitions/disposals

3,459

7,038

4,823

7,721

Financing

27,781

45,000

0

0

Dividends

(2,034)

(2,287)

(4,439)

(9,476)

Net Cash Flow

676

52,610

(6,611)

(11,586)

Opening net debt/(cash)

24,624

10,300

17,910

11,300

HP finance leases initiated

0

0

0

0

Change in borrowings

(15,000)

(45,000)

0

0

Closing net debt/(cash)

10,300

17,910

11,300

(286)

Source: Helios Underwriting accounts, Edison Investment Research. Note: *Shown after pre-acquisition impact and parent reinsurance result, investment income, costs and other items (see Exhibit 2 for a segmental view of syndicate result and parent result).


General disclaimer and copyright

This report has been commissioned by Helios Underwriting and prepared and issued by Edison, in consideration of a fee payable by Helios Underwriting. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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General disclaimer and copyright

This report has been commissioned by Helios Underwriting and prepared and issued by Edison, in consideration of a fee payable by Helios Underwriting. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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London, WC1R 4PS

United Kingdom

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Basilea Pharmaceutica — Zevtera crosses key US regulatory hurdle

Basilea has announced the FDA approval of its second lead asset, Zevtera (ceftobiprole), for the treatment of severe bacterial infections (three indications), marking a major commercial win. The US is the most commercially lucrative market for Zevtera, accounting for 85–90% of its total market potential. Zevtera is already approved in several countries (including in Europe) and the FDA nod is based on three Phase III studies (including the ERADICATE and TARGET studies with R&D partly funded by the BARDA). Note that the drug holds the Qualified Infectious Disease Product (QIDP) designation, which will provide up to 10-years of market exclusivity following approval. As we await more details on the US commercial partner (expected by mid-2024), we upgrade our US probability of success (PoS) to 100%, bumping our valuation to CHF1,008.6m or CHF84.0/share (from CHF80.7/share).

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