XL Capital Still Under Pressure
XL Capital Ltd. (XL) is expected to release its 1Q08 results on April 22, 2008, with a conference call scheduled the next day. XL's 4Q07 results missed expectations as a result of impacted of $41.5 billion in losses and write downs related to its operating affiliates and investment portfolio.
The shares of XL have been under pressure for quite sometime due to its relationship with
Security Capital Assurance (SCA) . This has also led to a reduction in the company credit rating by three major rating agencies. The potential liabilities and claims, if any that the company might have to cover because of problems at SCA, create uncertainty about XL's potential earnings.
We maintain our Hold recommendation prior to the release of Xl's 1Q08. Based on 4Q07 results, we have lowered our FY08 and 2009 earnings expectations to $9.50 per share and $9.90 per share, respectively, from $10.20 per share and $10.90 per share. At the current price level, XL's shares trade at 3.2x our revised 2008 EPS and 0.59x its 4Q07 book value of $51.16 per share; representing a 51% discount and a 58% discount, respectively, to its peer group medians.
For about 10 years prior, the price-to-book multiple had been in the 1.2 - 2.7x range. It will be difficult to envision the shares achieving even the low end of the range over the near term. We expect the negative news of late (lowering agency ratings, increased loss reserves, and the shoring up of its SCA investment), need to be fully digested before investors will come back to this name.
Our new six-month price target of $33 per share, down from $45 per share, incorporates a multiple of 0.6x (down from 0.8x previously) to our estimated book value of $55 per share at June 31, 2008, and implies a total annualized return of 11.2% (8.7% price appreciation + 5% annualized dividend).
Fair Value for Sinopec Shares
China Petroleum and Chemical Corporation or Sinopec's (SNP) financial results for 2007 showed declining growth. While a number of uncertainties remain, we believe that the near- to medium-term environment supports its continued upstream production growth and downstream capacity expansion. Moreover, Sinopec's integrated petrochemical and refining businesses are expected to benefit from possible price reform for refined products in China. Overall, we think the stock is fairly valued.
On April 7, 2008, Sinopec announced its annual results for the year ended 31 December, 2007. Under International Financial Reporting Standards (IFRS), the company's turnover with other operating revenues and income increased by 13.4% to RMB 1,209.706 billion in 2007. Profit attributable to shareholders of the company rose by 5.5% to RMB 56.533 billion. EPS in 2007 was RMB 0.652 ($8.93 per ADS), compared with RMB 0.618 in 2006.
Currently, SNP ADRs are trading at 9.8x our 2008 earnings estimate, slightly lower than its global peers and lower than its Chinese peers. SNP ADRs are also trading at 8.9x our 2009 earnings estimate, lower than its global peers. Our $97.75 price objective reflects a P/E multiple of 9.4x our 2009 earnings estimate. Therefore, we are maintaining Hold recommendation for Sinopec.
Revenues & Costs Balance SCOR
The SCOR Group (SCRYY) reported solid improvements in its operating income and net written premiums for 4Q07 and FY07. The new innovative hub structure is expected to further streamline the operations and increase proximity to markets and clients. While the company has greatly improved its capitalization, risk profile, and operating performance in the recent quarters, we expect it to face some headwinds in the coming quarters based on softening prices and integration risks with Revios and Converium.
At current levels, we continue to rate the shares of SCOR a Hold with a six-month target price of $2.50 per share. The revenues in the fourth quarter were stronger than expected, although the costs were also on the higher side.
