Buy Aegon Shares on Valuation
We are maintaining our Buy recommendation on Aegon NV (AEG), after the Dutch insurer reported a 9 percent rise in underlying earnings before tax in the first quarter. The ongoing softness in equity and debt investments as well as a weaker dollar in the United States, where it gets the bulk of its income, has hit Aegon's profitability. While the current environment will be challenging for investment portfolios, fundamentally little has changed, as the company is not facing capital shortage and the value of new business has increased by 20 percent.
The company experienced no impairments in its subprime investment holdings in the last quarter. As Aegon focuses mostly on life insurance, its position in the market is favorable compared with non-life insurance players in the market. Moreover, it has been able to buy businesses from troubled firms. The company further strengthened its distribution channel in Spain and is entering new growth areas such as Mexico and India and China.
The stock has declined significantly along with the recent market sell-off. At current multiple of 5.4x our current 2008 EPS and 1.1x Book, the stock is trading at multiples substantially below the average of that of its peers of 8.1x 2008 EPS and 1.2x book value. As such, we think that there will be potential gain for stock in the near term. Our six-month target price is $20.
New Reserves for Petrobras
We keep our Buy recommendation on Petroleo Brasileiro SA (Petrobras) (PBR), on the Brazilian state oil company's positive production-growth profile and the improving outlook for its downstream business. The recent discovery of the Tupi field opens up a new range of possibilities for the company in the long run.
Moreover, the continued high price of oil and the company's large inventory of development projects are also positive. Finally, Petrobras' first quarter results were better than expected, and the outlook for the following quarters remains encouraging.
Most of Petrobras' domestic operations are located in the offshore Campos Basin, which is Brazil's largest oil region and is one of the most prolific oil and gas areas in South America. Even without considering some important new discoveries, the company is expected to grow annual volumes by about 6 percent over the next few years. The company has laid out a realistic, but aggressive, plan to grow production volumes over the next few years by competitively developing its extensive, proved undeveloped reserve base in the Campos Basin and in select international markets, using its considerable expertise in deepwater oil exploration.
Until recent quarters, PBR used to trade at a discount due to the difficult political environment in Latin America.
