Mapfre: pressure on profitability, O.P. of 2.96 to 2.78 euros/share

Mapfre

Santander Corporate & Investment | A year after we renewed our coverage of Mapfre (MAP), our opinion remains unchanged. When began analysis of the company again last April, we expected that Mapfre would continue to trade within the range of prices of the last 10 years (2.50 €/share – 2.90€/share).

In our opinion, for the share value to deviate significantly from this level of c.1.0X P/B ratio, in line with its European counterparts and our valuation, it would require a strong catalyst or a significant increase in profits. Even if we reiterate our recommendation of Maintain, after reviewing our data, we have reduced our objective price from 2.96 to 2.78 €/share.

Despite foreseeing a notable operational improvement in 2021, we think that 2019 will probably be a complicated year. In 2018, Mapfre saw itself much affected by natural disasters, currency movements, low returns on investments and the ongoing restructuring of unprofitable businesses. Looking forward, we foresee more moderate head winds in currency movements and the restructuring, as well as an improvement in combined ratios. However, we continue to foresee significant pressure on returns from investments.

In our opinion, returns on investments will remain under pressure in 2019 in an environment of persistently low interest rates in the EU and lower inflation expectations in Latin America. We forecast a fall of 12 bp in the performance of the investment portfolio for 2019, to 2.22% from 2.34% in 2018 (and 2.68% in 2017), and a recovery of 17 bp in 2020, to 2.39%, followed by an increase of 22 bp in 2021.

We forsee a notable improvement in ROE, from 8.4% in 2018 (after the adjustment to take account of the deterioration of 173.5 Bn€ in the trading fund in Q419) to 8.9% in 2019, 10.3% in 2020 and 10.8% in 2021, supported by a good growth in gross premia of 12% in 2019 (still in the process of a certain restructuring), 3.5% in 2020 and 3.4% in 2021.