2013 mar 13 — topdanmark as

Topdanmark A/S Small/Mid-Cap: Insurance 1 A high price, eve n for excellence ● Downgrade to Sell: Following a rally in Topdanmark shares of over 20% this year, we downgrade our rating on the stock to Sell. The company now trades at 13.9x 2013E earnings that include material positive one-offs. The share price seems to reflect the market’s high expectations regarding Topdanmark’s ambitious 2013 buy-back programme, of which we would not necessarily assume full delivery. ● A full valuation: After eliminating the DKK140m of non-recurring life PBT we expect Topdanmark to enjoy in 2013, the stock trades on 15.2x 2013E earnings. We struggle to justify this multiple as the company faces headwinds to earnings from: i) declining investment yields; and ii) normalising non-life margins, which have been exceptionally high in 2013. We and consensus (Bloomberg) expect net income to fall by 8% and 4% in 2013-15 respectively. ● Delivery of 2013 buy-backs no certainty: Topdanmark aims to buy back DKK2,000m of shares during 2013. This seems very ambitious, particularly as the company has missed much smaller targets in each year since 2009. We note the following areas of uncertainty. o The narrow (10%) capital buffer targeted by Topdanmark could pose a risk to 2013 buy-backs. Our forecast suggests a full 36% of the programme will be funded from excess capital, leaving only a 4% buffer above the capital requirement at year-end 2013. o Topdanmark’s non-life business provides very stable results, but risks to earnings exist from: i) an increase in Danish bond yields, which would affect earnings negatively as the mark-to-market impact is partly taken through P&L; and ii) lower-than-expected repatriation of funds from the life insurance shadow account. ● A falling yield: It may be argued that the 11.2% 2013E buy-back yield on which Topdanmark trades justifies its valuation. However, the yield is expected to fall to around 6% in 2014-15, which appears less attractive considering the company pays out nearly all of its earnings and that these are expected to fall in 2014-15. ● Weakenin g operating trends: Although a strong headline beat, Q4 2012 earnings highlighted two negative operating trends. In non-life, regulatory changes mean Danish insurers will need to pay out higher compensation to people in “flex-jobs” (page 5). Meanwhile, a possible change to solvency rules could lead to DKK30m-40m of Topdanmark’s life shadow account being written off in 2014. ● Numbers: We change our 2013-14 net income estimates by 5.3% and -0.5% respectively, mainly to reflect re-modelling of the non-life investment result. Our RoNAV/SOTP-based valuation increases by DKK15 as we roll this forward to year-end 2013. Sell Rating system Current price DKK 144.10 Relative Price target DKK 125.00 12/03/201 3 Copenhagen Close Market cap DKK 17,860 m Reuters TOP.CO Bloomberg TOP DC Changes made in this note Rating Sell (Hold) Price target DKK 125.00 (110.00) Chg 2013e 2014e 2015e old Δ% old Δ% Old Δ% Net inc. 1,222 5.3 1,230 -0.5 na na EPS 102 5.7 109 1.2 na na DPS 114 47 .1 127 -21.9 na na Source: Berenberg Bank estimates Share data Shares outstanding (m) 124 Daily trading volume 29,819 Performance data High 52 weeks (DKK) 144 Low 52 weeks (DKK) 91 Relative performance to SXXP SXIP 1 month 24.6% 22.7% 3 months 19.1% 17.7% 12 months 40.2% 26.3% Business activities: Insurer focused on the Danish market. Predominantly non-life, with a small life operation. Non-institutional shareholder s: Sampo 23% 13 March 2013 Sami Taipalus Analyst +44 20 3207 7866 [email protected] Trevor Moss Specialist Sales +44 20 3207 7893 [email protected] Y/E 31.12., DKKm 2011 2012 2013E 2014E 2015E Net income 1,023 1,823 1,287 1,224 1,178 EPS 7.44 14.2 10.8 11.0 11.4 Buy-back per share 8.43 9.35 16.8 9.9 10.2 Net asset value per share 29.0 38.1 38.5 44.3 50.5 RoNAV (%) 28.8 48.6 28.6 30.5 27.3 P/E 17.5 9.8 13.9 14.6 15.2 Buy-back yield (%) 6.5 6.7 11.2 6.2 5.9 Price / net asset value (%) 462 379 424 392 366 Source: Company data, Berenberg Bank

2013 mar 13 — topdanmark as

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