Genworth MI Canada Inc

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Genworth MI Canada Inc

Q3 Preview: Expecting Another Earnings Beat, Plus A Dividend Bump

Our Conclusion

The unemployment rate in Canada has hit a nine-year low. Employment is the primary driver of claims losses and thereby Genworth’s earnings. You don’t need to know much more than that to understand why we think Genworth will beat earnings expectations again with Q3 results. To boot, we are expecting a dividend increase of 8%. Genworth is trading at 0.9x BV, leaving room for upside on the back of an EPS beat and dividend increase. We reiterate our
Outperformer rating heading into the quarter.

Implications

Our Q3 operating EPS estimate is $1.19 (unchanged), which compares to $1.36 last quarter and $1.02 a year ago. Falling delinquencies should provide a Y/Y lift to EPS while lower reserve development accounts for the Q/Q decline. Our estimate is above the consensus
estimate of $1.12.

Genworth has increased its dividend every year with Q3 results, with a CAGR of 9% over the last five years. Given strong EPS growth over the last year, we expect to see a high-single-digit increase (8%) to be announced with Q3/17 results.

Strength in the job market across all major regions has pushed the national unemployment rate to a nine-year low of 6.5%. The housing market has cooled, particularly in the GTA, meaning that volumes will be down Y/Y, but the path of house prices is unlikely to pressure claims losses. This backdrop supports our view for a loss ratio of 16%, towards the lower end of management’s guidance of 15%-25%.

Favourable reserve development last quarter implies: 1) better-thanexpected underlying trends; and 2) that EPS in prior quarters were understated. We think that simply excluding reserve development from Q2 EPS misses the point. Consensus for Q3 EPS looks too low.

Genworth expects to report its third-quarter results during the first week of November. The exact day and conference call details have yet to be announced.