In the Nigerian stock market, the insurance sector is typically overshadowed by banking and industrial giants.
Yet, Sunu Assurances Plc has defied expectations, emerging as one of the best-performing stocks on the Nigerian Exchange (NGX) in 2024.
With an impressive 581% year-to-date (YtD) gain as of December 20, the company is not only the top performer in the insurance sector but also the second best-performing stock across the entire NGX.
This remarkable rally, following a 279% YtD gain in 2023, raises pressing questions: What is fueling Sunu’s meteoric rise, and is the stock worth holding into 2025?
A broader context: The insurance sector
Sunu’s rally reflects a broader resurgence in Nigeria’s insurance sector. The 22 listed insurance stocks achieved an average YtD gain of 89% in 2024, outperforming most others on the NGX. This trend builds on the 76.18% mean YtD growth recorded in 2023.
While the NGX Insurance Index delivered 92.49% YtD return, the NGX All Share Index managed a more modest 35.25% gain. The banking sector saw its average YtD return plummet to 23.30% in 2024, from 128% in 2023.
Amid these dynamics, Sunu Assurances stands out, delivering inflation-protected returns.
The Fundamentals
Growth: Founded in 1984 as Equity Assurance, Sunu underwent a transformation when it was acquired by the SUNU Group, a pan-African insurance powerhouse operating in 17 countries.
- Sunu’s operational turnaround is evident in its financials. Since reporting a pre-tax loss of N266 million in 2019, the company has posted consistent profits.
- In 2023, profit before tax (PBT) surged by 290% to N2.817 billion, and by the first nine months of 2024, PBT had already surpassed 2023 profit by 85% reaching N5.216 billion.
- Insurance revenue has followed a similar trajectory, growing at a compound annual growth rate (CAGR) of 44% over five years and achieving a 69% rise in the first nine months of 2024 to N11.395 billion, surpassing 2023’s full-year revenue by 15%.
Efficiency: Efficiency is a big part of Sunu’s success story. One key measure is how much the company pays out in claims compared to the premiums it earns.
- This number dropped significantly from 36.69% in the first nine months of 2023 to 21.49% in the same period of 2024.
- In simple terms, Sunu is keeping more of the money it earns, which shows it’s managing risks and claims better than before.
Additionally, the unearned premium-to-gross premium written ratio declined from 16.10% to 13.31% over the same period, reflecting better revenue recognition and reduced liabilities.
The risk of overreliance
While Sunu’s operational performance is commendable, a closer look reveals potential vulnerabilities.
- Approximately 62% of its nine months 2024 PBT stemmed from foreign exchange gains; a one-off windfall rather than a sustainable driver of profitability.
- This reliance on non-operating gains poses risks akin to depending on a bonus to meet recurring expenses: it’s a temporary fix, not a long-term solution.
- Moreover, investment income, at just N976 million, contributes little to overall earnings, highlighting a concentration on insurance income.
This lack of diversification could expose the company to sector-specific shocks.
Market position and valuation
Sunu’s stock performance has been nothing short of extraordinary. Closing at N7.49 on December 20, it reached new 5-year and 52-week highs, with a market capitalization of N43.5 billion.
- Liquidity remains strong, with 125 million shares traded over three months, ranking it the 46th most traded stock on the NGX.
- At current levels, the stock offers a dividend yield of 2.39% and boasts a total shareholder return of 583.30%.
- However, Sunu’s valuation metrics warrant scrutiny. Trading at earnings multiple (P/E) of 7.98x, it significantly outpaces the insurance sector’s average of 2.72x.
- While its return on equity (ROE) of 32% comfortably exceeds its cost of equity (17%), the premium valuation reflects heightened expectations.
Investors should consider if the company’s impressive growth story is worth paying a higher price for its stock, especially when there are potential risks involved.
Outlook: Bright but cautious
Sunu has projected a Q4 2024 PBT of N4.43 billion, and based on its track record, it is likely to exceed this estimate.
- With a price-to-earnings growth (PEG) ratio of 0.04 compared to the peer average of 0.01, Sunu Assurances appears more expensive relative to its growth.
- However, the PEG ratio is still relatively low and more so may be justified by its robust track record of rapid profit and revenue growth, making its growth potential compelling for investors who believe in its ability to sustain this momentum.
- Technical analysis supports a strong buy recommendation, but this must be balanced against one-off gains and concentrated revenue streams.
- Overall, Sunu Assurances has delivered impressive returns, offering investors who took a position at the start of 2024 a theoretical capital gain of 581%. This far outpaces its peers and provides inflation-beating returns.
- Its growth narrative is supported by improved operational efficiency and a strong market presence. However, reliance on non-operating gains and limited income diversification raises concerns that investors cannot overlook.
The critical decision for investors now is whether to hold onto these gains or lock in profits.
While Sunu’s fundamentals indicate it remains a strong contender, as with all high-flying stocks, vigilance is key.
Investors should monitor growth driven by core operations and efforts to diversify revenue sources.
If Sunu successfully addresses these risks, its extraordinary rally could extend into 2025 and beyond.
