Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 1Q13 Earnings Update
Prev. Ed.: May 2, Flash update on 1Q13 Earnings Results
Brokers’ Recommendations: Neutral: 64.3% (9 firms); Positive: 28.6% (4); Negative: 7.1% (1) Prev. Ed.: 12; 3; 1
Brokers’ Target Price: $40.70 (↑ $3.80 from last edition; 10 firms) Brokers’ Avg. Expected Return: 3.6%
*Note: Though dated Jun 28, 2013, share price and brokers’ material are as of Jun 11.
Note: The tables below for Revenues, Margins, and Earnings per Share contain fewer brokers’ material than that used in the Valuation table and PMES section. The extra figures in the Valuation table and PMES section come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Willis Group Holdings Limited (WSH) is an insurance broker. The company reports its business in three segments: Global, North America, and International. Willis' international footprint is understated in its revenue mix mainly due to its strategic minority stake in Gras Savoye, the largest insurance broker in France, the largest European insurance market.
Almost 64.3% of the firms in the Digest group covering Willis Group had a cautious outlook, while 28.6% conferred a positive rating on the stock and the remaining 7.1% rated the stock negatively. Of the 14 firms covering the stock, 10 provided target price ranging from $33.00 (16% downside from the current price) to $46.00 (17.1% upside from the current price).
Neutral or equivalent outlook – 9/14 firms or 64.3%:The cautious firms expect expenses in 2013 to rise and thus earnings to weaken due to reinvestment made by Willis to drive growth in the face of global economic unrest. EBITDA margins are expected to erode considerably in 2013 and improve slightly in 2014.
They expect Willis’ to grow organically with some support from its International and Global segments. They expect the North America segment to take another 12-24 months to catch up with its peers in terms of organic growth. The firms, however, are optimistic that over time, as the performance of the North America segment improves and economic conditions stabilize, growth will gradually gain pace, eventually minimizing the gap between Willis Group Holdings and its peers. At the same time, they are of the opinion that this improvement is unlikely before 2014. They also believe that Willis represents a somewhat unimpressive investment case as a result of low acquisitions leading to constricted top and bottom line figures.
Firms believe Willis is positioned to reclaim its top‐tier status among the insurance brokers, but given the lack of visibility on future earnings growth, firms prefers to remain on the sideline.
Buy or equivalent outlook – 4/14 firms or 28.6%- The firms recognize that the company is almost stagnant in comparison to its competitors, which however can restrict the downside and hence buy time for new management to come up with a more competent arrangement. The firms are optimistic about the new CEO, Dominic Casserley who is expected to focus more on strategic moves than operations to improve the present situation of the company.
Negative or equivalent outlook– 1/14 firm or 7.1%- The firm is of the opinion that though the recently declared change in leadership could benefit the company, the transition will not be easy owing to the potential risks to the upcoming term earnings. However, it believes that the benefits can only be reaped in the future.
It believes that further reinvestment and controlled cost-savings are necessary to amend the situation.
Jun 28, 2013
Overview
Key investment considerations as identified by the analysts are as follows:
Key Positive Arguments / Key Negative ArgumentsGrowth Opportunities
- The company has a global presence and can capitalize on opportunities offered.
- It is focused on organic growth, client service, and operating efficiencies.
- It has a strong cash flow, an active share repurchase program, and a good dividend yield.
- With the HRH acquisition, the company attained the highest level of client retention.
- Improving Property and Casualty segment and improving interest rates.
- It has shown mid-single digit organic growth in Global Specialties segment, which has contributed substantially to its growth.
- The company is a player in a highly competitive brokerage landscape, where new and existing competitors are vying for market share.
- The industry is subject to fluctuations in insurance premiums and inherent cyclicality in the industry, as its peers lower their prices to gain market share.
- The company is exposed to foreign exchange risk, attributable to significant international operations.
- Softening market trends would adversely affect revenues.
- Commercial lines price competition may impact revenue growth and operating margins.
- The persistent sluggish performance of the North American segment hampers the overall results of the company.
London-based Willis Group Holdings Ltd. (WSH), is a global insurance broker, developing and delivering professional insurance, reinsurance, risk management, financial and human resource consulting and actuarial services to corporations, public entities and institutions around the world to clients in various industries, including aerospace, marine, construction, and energy industries. In its capacity as an advisor and insurance broker, the company acts as an intermediary between clients and insurance carriers by advising clients on risk management, helping them determine the best means of managing risk, and negotiating and placing insurance risk with insurance carriers through its distribution network. WSH divides its operations into three segments – Global, North America,and International.
For more information on the company, visit its website at
Note: The company’s fiscal year references coincide with the calendar year.
Jun 28, 2013
Long-Term Growth
The firms believe that sluggish economic conditions coupled with Willis’ decelerating pricing conditions will restrict the company’s organic growth in the near future. The transformation of the current situation will not be hassle free and even the appointment of Dominic Casserley as the CEO may not help the cause. At the same time, it is expected that although near-term margins could be pressurized by investments undertaken by new management, yet going forward, revenues and margin growth will excel.
Based on the current weak scenario at the North America segment, the firms do not expect any recovery before a couple of years. However, once this segment begins to improve, its performance combined with moderate expense growth is expected to drive profitability for the company.
The firms believe that Willis' focus on emerging economies will provide significant growth prospects in the long run.
Jun 28, 2013
Target Price/Valuation
Rating DistributionPositive / 28.6%↑
Neutral / 64.3%↑
Negative / 7.1%↓
Avg. Target Price / $40.70↑
Digest High / $46.00↑
Digest Low / $33.00
No. of the analysts with target price/Total / 10/14
Risks to the target price include economic downturn, P&C rate softening, restrained inorganic growth, increase in perks and compensation paid by the company due to increased headcount, risks related to exchange rate fluctuations and peer pressure, sluggish growth, margin compression, lower retention, and the Stanford litigation.
Recent Events
On Apr 30, 2013, Willis Group Holdings Plc reported first-quarter 2013 adjusted net income of $1.46 per share, surpassing the Zacks Consensus Estimate of $1.31 per share. Results also exceeded the year-ago net income by 10.6%.
Total revenue in the quarter was $1.1 billion, up 3.8% year over year due to higher commissions and fees (up 4.1% year over year). Results were in line with the Zacks Consensus Estimate.
Dividend Update
In Apr 2013, the board approved a quarterly cash dividend of $0.28 per share, representing a year-over-year hike of 3.7%. Willis will pay the dividend on Jul 15, 2013 to shareholders of record as on Jun 28, 2013. The annualized dividend comes to $1.12 per share.
Financial Position
Willis exited the quarter with cash and cash equivalents of $531 million, up 6.2% from 2012-end level.
Total debt increased 2.1% from to $2.39 billion as of Mar 31, 2013 from $2.34 billion as on Dec 31, 2012.
Debt-to-capital ratio of the company improved 180 basis points to 55.9% in the quarter.
Revenue
Total revenue in the quarter was $1.1 billion, up 3.8% year over year due to higher commissions and fees (up 4.1% year over year). Results were in line with the Zacks Consensus Estimate.
Provided below is a summary of revenues as compiled by the Zacks Digest:
Revenue ($ in million) / 1Q12A / 4Q12A / 1Q13A / 2Q13E / FY12A / FY13E / FY14E / FY15EDigest High / $1,013.0 / $871.0 / $1,051.0 / $880.0 / $3,480.0 / $3,629.0 ↑ / $3,807.0↓ / $3,996.0
Digest Low / $1,013.0 / $871.0 / $1,051.0 / $875.0 / $3,480.0 / $3,617.0 ↑ / $3,761.0 ↑ / $3,996.0
Digest Average / $1,013.0 / $871.0 / $1,051.0 / $877.3 / $3,480.0 / $3,623.3↑ / $3,784.7↑ / $3,996.0
Digest YoY Growth / 0.6% / 6.3% / 3.8% / 4.2% / 1.0% / 4.1% / 4.5% / 5.6%
Digest Sequential Growth / 23.7% / 15.5% / 20.7% / -16.5%
Provided below is a summary of revenue components as compiled by the Zacks Digest:
Revenue ($ in million) / 1Q12A / 4Q12A / 1Q13A / 2Q13E / FY12A / FY13E / FY14E / FY15ECommission & fees / $1,005.0 / $867.0 / $1,046.0 / $871.5 / $3,458.0 / $3,602.0↑ / $3,755.5↓ / NA
Investment Income / $5.2 / $4.0 / $4.0 / $4.0 / $18.3 / $16.0↓ / $16.0↓ / NA
Other Income / $3.0 / $1.0 / $1.0 / $4.0 / $2.5 / $4.0 / NA
Total Revenue / $1,013.0 / $871.0 / $1,051.0 / $877.3 / $3,480.0 / $3,623.3↑ / $3,784.7↑ / $3,996.0
Revenue Components
Commission & Fees
Organic growth in commissions and fees was 4.1%, driven by solid results across all the three segments.
Global: Organic growth in commissions and fees was 4.1% in the quarter, while reported growth was 3.5%.
Growth was driven by better results in Willis Re, which led to high-single digit growth in the quarter.
North America: Commissions and fees, on an organic basis grew 4.3%, while on a reported basis grew 4.9%.
The improvement came on the back of better performances across most of Willis North America's geographic regions, particularly the Human Capital Business.
International: Commissions and fees increased 3.8% both on an organic basis as well as reported basis. Results were driven by mid-single digit growth in Eastern Europe and Australasia, low single-digit growth in UK, double-digit growth in Latin America and Asia.
InvestmentIncome
Investment income declined 20% year over year to $4 million in the reported quarter.
Outlook:
One cautious firm projects the North America segment to generate higher organic growth compared with the current level. It also expects global and international segments to generate organic growth in the range of 3% to 4% in the next three quarters. However, the firm remains concerned regarding the difficult reinsurance brokerage environment and impact of European exposure.
Please refer to the Zacks Research Digest spreadsheet for more details on revenue estimates.
Margins
Willis reported salaries and benefits of $539 million in 1Q13, up 6.5% from $506 million in 1Q12. Salaries and benefits, as a percentage of revenues, were 51.3%, up 130 basis points year over year.
Salaries and benefits in 1Q13 included $29 million associated with previously announced charge related to headcount reduction and property and systems rationalization costs.
Reported other operating expenses were $156 million for 1Q13, flat with the prior-year quarter. Other operating expenses, as a percentage of revenues, were 13.7% compared with 14.1% in 1Q12.
Total expense shot up 9.8% year over year to $764 million mainly due to higher salaries and benefits (up 12.3% year over year), and depreciation expense (up 36.8% year over year).
In the quarter under review, adjusted operating income was $333 million, up 0.9% year over year. Operating margin declined 90 basis points to 31.7% in the first quarter of 2013.
Provided below is a summary of margins as compiled by the Zacks Digest:
Margins / 1Q12A / 4Q12A / 1Q13A / 2Q13E / FY12A / FY13E / FY14E / FY15EPre tax Operating Margin / 29.4% / 15.5% / 28.7% / 17.1% / 17.9% / 18.0%↑ / 18.8%↑ / NA
Net Operating Margin / 22.2% / -92.4% / 20.8% / 11.6% / -12.8% / 12.5%↓ / 14.2%↑ / 15.3%
Segment Details
North American operating margin in the quarter expanded 90 basis points (bps).
Global operating margin was 44.5% contracting 360 bps y/y.
International reported operating margin of 28.5%, expanding 80 bps y/y.
Tax
The effective tax rate was 19% in 1Q13. For full year 2013, tax rate is expected to increase to 22%, while for the next three quarters it is projected in the range of 22%–26%.
Cost Savings Initiative
Willis Group recorded a $46 million pretax charge during the reported quarter related to the previously announced assessment of the company’s organizational design.
Management eliminated 207 positions and rationalized property and systems.
From the second quarter of 2013, Willis Group expects to realize cost savings through the above actions of approximately $20 million in 2013.
Outlook
Firms in the Digest Group expect total operating expense to increase faster than total revenue growth, pressurizing operating margin expansion. However, operating expense is projected to increase at a slower rate than total revenue growth, driving operating margin expansion.
Please refer to the Zacks Research Digest spreadsheet for more details on revenue estimates.
Earnings per Share
Willis Group reported first-quarter 2013 adjusted net income of $1.46 per share, surpassing the Zacks Consensus Estimate of $1.31 per share. Results also exceeded the year-ago net income by 10.6%.
Including per share charge of $0.22 on account of expense reduction initiative, Willis Group reported net income of $1.24 per share, down 3.1% year over year.
Provided below is a summary of EPS as compiled by the Zacks Digest:
EPS (in $ per share) / 1Q12A / 4Q12A / 1Q13A / 2Q13E / FY12A / FY13E / FY14E / FY15EDigest Average / $1.32 / $0.45 / $1.46 / $0.55 / $2.58 / $2.73↑ / $2.97↓ / $3.28
Digest High / $1.32 / $0.45 / $1.46 / $0.60 / $2.60 / $2.80↓ / $3.10↓ / $3.40
Digest Low / $1.32 / $0.45 / $1.46 / $0.48 / $2.58 / $2.59↑ / $2.85 / $3.15
Digest YoY Growth / 2.8% / -1.5% / 10.5% / -6.5% / -6.1% / 5.7% / 8.9% / 10.2%
Digest Sequential Growth / -62.2%
Highlights from the EPS chart are as follows:
- 2013 forecasts (total 5) range from $2.59 to $2.80; the average is $2.73.
- 2014 forecasts (total 5) range from $2.85 to $3.10; the average is $2.97.
- 2015 forecasts (total 2) range from $3.15 to $3.40; the average is $3.28.
Outlook
Some of the firms with a cautious outlook raised the EPS estimate for 2013 and 2014 to account for the 1Q13 outperformance, higher margin expectation and lower tax rates for the next two years. However, higher average shares outstanding might be a drag on the bottom line
One firm with a bearish stance raised the EPS estimate for 2013 to reflect better-than-expected first-quarter results.
As per the Zacks Digest model, the firms expect the share count to increase 0.6% y/y to 176.4 million by the end of FY13, by 0.5% y/y to 177.3 million by the end of FY14 and increase by 1.2% y/y to 179.4 million by the end of FY15. This represents a three-year CAGR of 0.7% on FY12 shares outstanding.
As per the Zacks Digest model, FY13, FY14 and FY15 EPS is expected to increase driven by an increase in net income from continuing operations, partially offset by increase in shares outstanding.
Please refer to the Zacks Research Digest spreadsheet for more details on revenue estimates.
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Research Analyst / Tanuka DeCopy Editor / Neelanjan Barua
Content Ed.
Lead Analyst / Tanuka De
QCA / Tanuka De
No. of brokers reported/Total brokers / 14/14
Reason for Update / Earnings