Outlook For Manulife In 2018
Manulife Financial (NYSE: MFC) has seen solid results in recent years, with its EPS consistently beating market expectations. The company saw its revenue grow by 11.7% in 2017, driven by higher annualized premium equivalent (APE) sales across Asia, efficient pricing decisions in Canada, and higher universal life and variable universal life sales in the U.S. More recently, however, the company stopped sales of corporate and bank-owned life insurance products in the U.S., which negatively impacted insurance growth. The Q1’18 earnings released on May 2 reported a 10% drop in APE sales for the quarter. Moreover, the company incurred a $4.1 billion loss, primarily related to fair value movements on bonds and derivatives. That said, the company reported strong segment results, with growth in premiums and deposits and assets under management contributing to growth in core earnings.
After lower than expected revenue in the first quarter, we expect the company to deliver solid results for the rest of the year. Additionally, the company should benefit from its strategies to reduce operating costs. The stock price dipped slightly after the earnings release, but has soared above the pre-earnings levels since then. It currently trades at around $19, but is that price sustainable? Our valuation dashboard suggests that the current market price may still be cheap. Below we discuss how we estimate Manulife’s valuation. Detailed steps to arrive at our price estimate and the revenue calculations are outlined in our interactive dashboard, and you can modify our assumptions to arrive at your own price estimate for the company.
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We have a price estimate of $21 for Manulife, which is ahead of the current market price. This is based on revenue projections of about $44.5 billion. Asia has always been a stronghold for the company, and we expect this trend to continue in the future. ManulifeMOVE, an activity tracking platform that offers premium discounts to customers who stay active, has been a hit in China and was introduced in Singapore recently. This move will likely generate additional premiums for the company. Moreover, technological advancements such as facial recognition for the seamless e-claim process will improve the customer experience. The company has also stated its plans to reduce its ALDA (Alternative Long Duration Assets) portfolio by disposing of real estate assets and using the proceeds for expansion. Meanwhile, we expect another year of favorable net flows that will drive up AUM. Consequently, the company’s WAM (Wealth and Asset Management) business to generate higher fee income.
Furthermore, we expect margins to improve on the back of cost optimization measures. The company has announced the consolidation of IT infrastructure vendors and its head office in Boston. Manulife expects to save $70 million out of these measures. We forecast adjusted net income of about $4.05 billion, or EPS of about $2.04. Finally, using our estimated P/E multiple of 10.4 gives us $21 as a fair price estimate.
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