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2 Strong Reasons Behind This Share’s 200% Gain

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Local insurance outfit Great Eastern Holdings (SGX: G07) seems to be given the cold shoulder often when others discuss big winners in the local share market.

However, with total returns (capital appreciation plus gains from reinvested dividends) of 200% since the start of 2004 – or an annualised compounded return of 10.8% – the insurer has certainly delivered some pleasing returns. That’s especially so when considering that the SPDR Straits Times Index ETF (SGX: ES3), an exchange-traded fund that tracks the Straits Times Index (SGX: ^STI), has clocked total returns of ‘only’ 137.9% (or 9.05% per year on average) in the 10 years ended 30 June 2014.

Between 2004 and the 12 months ended 31 March 2014, Great Eastern Holdings’ book value per share (an important metric in assessing the growth of an insurance company’s true economic value) has grown steadily from S$4.91 to S$11.19. The following are two factors that have helped drive the company’s business performance.

A handful of takaful

Islamic finance is gaining popularity in the Asian region and beyond. For instance, Standard & Poor’s estimated the Islamic finance market to be worth US$1.4 trillion in 2011 and the credit ratings agency had also pegged the market as “likely to continue their impressive streak of double-digit growth in the coming two to three years.”

Similar to Islamic finance, takaful (Islamic insurance) is one of the fastest growing sectors in the insurance industry currently; according to research from Ernst and Young’s, the global takaful market had been growing at 20.8% annually on average from 2007 to 2012. Great Eastern seems very well-positioned to capture the burgeoning growth in that market.

Firstly, the company had been voted the “Best Takaful Operator in Asia” by the Islamic Business & Finance Awards in 2013. Secondly, Malaysia is one of Great Eastern’s key geographical markets, accounting for 39% of the company’s revenue in 2013; the country is now the world’s largest family takaful market.

A strong franchise

Great Eastern is actually the oldest insurance company in Singapore. Founded in 1908, it is now one of the leading life insurance companies in Singapore and Malaysia. In 2013, the company collected almost S$8 billion worth of gross premiums, its highest ever in its 106 years of history.

The insurer became substantially owned by Oversea-Chinese Banking Corporation (SGX: O39) in 2004. Since then, the life insurer has had the ability to leverage on the network of OCBC to expand its presence around the region. With such a strong heritage and support from its parent company, Great Eastern is in possession of what is likely one of the strongest insurance franchises in Singapore.

Foolish Bottom Line

But of course, the company has its risks despite its strong franchise and potential growth in the takaful market. For instance, the company was only able to improve its net profit by 6.9% per year on average since 2009. That’s hardly considered a fast rate of growth by any measure; yet, the company is currently trading at a P/E ratio of more than 15 times, giving it a PEG ratio of more than 2.1 times.

Furthermore, according to a Swiss Re – Sigma report, Singapore and Malaysia’s insurance market penetration is already at about 5% to 6% of their respective GDPs. That is much higher than growth markets such as Indonesia or China, which have an insurance market penetration of only about 2% to 3% of their respective GDPs. Given that Singapore and Malaysia are Great Eastern’s core markets as mentioned earlier, the company might face a bottleneck in growth.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.