Investors sell Tower, although analysts say buy

By Jenny Ruth

Thursday 17th December 2009

Direct Broking's clients sold more shares in insurance company Tower through November than any other stock, the broking firm reports.

Those clients were selling into a rising market. The shares ended October at $1.72, sank as low as $1.67 in early November and peaked at $1.95 near the end of the month.

But should they have been selling? On November 26, the insurance company reported a 23.8% rise to $50.1 million in annual net profit. That was the first news since October 8 when the company said the tsunami in Samoa would cost it about $5 million before tax.

Analysts aren't recommending investors sell Tower shares.

First NZ Capital says the result demonstrates Tower's underlying progress with most divisions reporting "robust trends." It raised its earnings forecasts between 8% and 10% on the strength of the results and increased its 12-month target price to $2.35 a share from $2.15.

John Cairns at Forsyth Barr also upgraded his forecasts and raised his valuation from $1.98 a share to $2.30. Cairns says after its recent capital raising, Tower has $66 million net cash. (Tower raised $81.3 million from a rights issue in September.)

Given Tower's target gearing ratio between 20% and 30%, that implies potential acquisitions of about $200 million, he says.

"We think the acquisition risk is mitigated by the involvement of Tower's major (35%) shareholder GPG," he says.

Adrian Allbon at Goldman Sachs JB Were, who has a $2.35 12-month target and recommends investors buy the stock, says looking to add scale to its four divisions, health, life and general insurance and investments, "is a sensible strategy and one which complements its investment case."

However, if Tower is unable to find something on which to spend its cash, "this will quickly become a drag on its performance metrics."

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