Genworth Australia’s pricing of its $754 million float has been backed by two major brokers, despite concerns about the heated property market and the risk that banks may pull back their usage of mortgage insurance.
In the first analysis of Genworth done by investment banks not selling the float, CIMB said Genworth’s price to book valuation stacked up “through the cycle” and its expectations for the growth of the mortgage market were “relatively conservative”.
Genworth’s US parent last month filed an offer prospectus to sell 30 to 40 per cent of its Australian lenders mortgage insurance (LMI) company through an initial public offering, raising up to $754m in one of the biggest floats of the year.
Genworth’s bankers — Goldman Sachs, Macquarie, UBS and Commonwealth Bank — are leading management on a roadshow to fund managers, visiting Sydney and Melbourne this week before heading overseas.
After a “high level” look at Genworth’s prospectus, CIMB analyst Richard Coles yesterday valued the insurer at a price-to-book multiple of 0.95-1.1 times, above Genworth’s implied 0.65-0.85 times, based on the IPO price of $2.20 to $2.90 a share.
Shaw Stockbroking analyst David Spotswood also told clients Genworth’s IPO price range appeared “reasonable”, after he valued the stock at $3 to $3.40.
But Mr Coles conceded fund managers would apply a discount to his valuation, given the “negative sentiment” surrounding Genowrth’s exposure to a property crash and whether banks would still use LMI in the longer term.
Banks require customers to take out LMI when they have less than a 20 per cent deposit for a mortgage, leaving Genworth and rival QBE highly exposed to property prices. But Genworth has conceded banks may choose to accept more risk internally.
“Lower house prices, through higher interest rates or rising unemployment, could result in a material impact to Genworth’s earnings,” said Mr Spotswood.
Genworth’s previous failed attempts to float and the overall market’s “expensive” valuation were also a “problem”, said a fund manager.
Sources close to the IPO conceded the float would not be for all investors, but expressed confidence it would get away given that it had deliberately been priced relatively cheaply. He said Genworth’s US parent would probably accept a price at the lower end of the IPO price range, but remained hopeful interest would be strong.
Genworth Australia posted a 35 per cent rise in profit to $US62m in the first quarter compared to the same period last year, as its loss ratio improved to 17 per cent, its US parent reported yesterday.
Mr Coles also said recent concerns LMI might disappear as a product had been overplayed.