Daily ShareChat: Tower

By Jenny Ruth

Wednesday 2nd September 2009

Insurance company Tower's $81.3 million rights issue is "perplexing" given it's capital position is sound with gearing of just 35%, says Morningstar Reearch.

"It already has $180 million of surplus cash, including $80 million of bonds, at its disposal."

Tower says the main purpose for raising capital is to seek strategic acquisitions although it has nothing definite at the moment.

The 5-for-16 rights issue is priced at $1.34 per share compared with the $1.81 price the shares were trading at before the issue was announced.

"We wonder why the firm chose to issue shares at a deep discount considering it does not need the money urgently," Morningstar says.

"We also wonder whether Guinness Peat Group (which owns 35% of Tower) played a role in persuading management to undertake a rights offering in a bid to lower its average purchase price," it says.

It says except for health insurance, ‘Tower's competitive position remains weak in life and general insurance. Competition remains fierce but so does the potential for growth, given significant levels of under-insurance."

Tower has under-performed in life and general insurance products due to poor service levels and higher lapse rates but a material turnaround could boost earnings.

BROKER CALL: Morningstar Reearch RATE Tower (NZX: TWR ) as hold (downgraded from accumulate but Morningstar advises Tower shareholders to take up their rights to take advantage of the discount.)

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