Broker's take: Citi downgrades Great Eastern to 'hold', expects 32% decline in FY2020 profit

CITI Research has downgraded insurer Great Eastern Holdings to "hold" and slashed its price target to S$19.50 from S$27 to take into account an estimated net profit decline of 32 per cent for FY2020.

The decline in net profit projections assumes the impact of weak investment performance on earnings for both Great Eastern's insurance and shareholders' funds.

Citi Research analyst Robert Kong said: "While Great Eastern remains a solid, stable life insurance company with a strong franchise and healthy balance sheet, the recent economic and financial markets fallout from Covid-19 outbreak could have a sharp negative impact on near-term (largely non-operating and investment) earnings."

This, he added, is likely to be evident from the insurer's first quarter results, which is likely to be released in late April.

Great Eastern's core insurance business could see a sharp slowdown in premium sales, as social distancing measures limit the ability of its agents to meet clients, and its insurance and shareholders funds might see weaker performance from its equity portfolio, Citi said.

Great Eastern's historical price-to-book (P/B) valuations are highly correlated with 10-year US bond yields, noted Mr Kong.

He pointed out that Citi's prior upgrade of Great Eastern in early September 2019 was premised on the view that 10-year US bond yields would stabilise, but they have since fallen "well below" 1 per cent in the past two weeks.

He said: "GEH (Great Eastern) has since de-rated to a 20-year low trailing price-to-book ratio of one times (2009 global financial crisis low 1.1 times P/B), which although cheap in our view can only rerate once the US/global economy shows signs of recovery."

The performance of Great Eastern, the insurance arm of OCBC Bank, is likely to affect the bank.

Citi estimates that a S$300 million fall in pre-tax income of Great Eastern would form about 6 per cent of OCBC's predicted FY2020 profits before tax.

"While manageable, this could compound OCBC's profit pressures," Mr Kong said.

Great Eastern contributes to around 20 per cent of OCBC's profits.

As at 10.40am, shares in Great Eastern were trading unchanged at S$18.20. Meanwhile OCBC Bank shares were S$0.13 or 1.5 per cent higher at S$8.74.