Admiral Post mortem:
A few weeks ago, after the 6M numbers, I sold out of Admiral, after holding it for ~10 years. I already had updated my thesis in 2022 where I “re-undwerwrote” the stock for 3 more years.
So why now selling it just after 2 years ? First, the stock price nicely recovered from 17,5 GBP per share 2 years ago to around 30 GBP when I sold after the earnings announcement. Secondly, it seems that Admiral is really not able to “copy&paste” its formula outside the UK.
Yes, the US was somehow profitable in the first 6M, but with dramatically shrinking premium volume which clearly is not sustainable, More worrying for my is the lack of growth in the European operations. This is the page from the 6M presentation:
Very little growth and still no profits. When I compare for instance ConTe (+5% premium in 6M 2024) with Bene, a portfolio company of Italmobiliare, it becomes pretty clear that Admiral has somehow lost its edge. Bene is growing 30% and stil making money, whereas ConTe barely grows anymore.
The main difference between Bene and ConTe in my understanding is that Bene is selling their products “Multi channel” whereas ConTe to my understanding uses the classical Admiral playbook online only via comparison sights. Maybe Digital only does not work so well in Italy, Spain and France ?
So my initial thesis of the Non-UK motor business as growth engine is clearly broken. In my eyes, with its continued diversification, Admiral more and more looks like a “normal” insurer with al the complexity attached.
As the UK business in my opinion is quite cyclical, I decided to sell at a share price of 30 GBP. At that valuation, Admiral in my opinion is fairly priced. I will watch them going forwad of course, but for now I see better opportunities.
Over the 10 year holding period, the EUR return (pre Tax) was around 14% IRR. I bought the stock back then at 13,8 GBP and collected an additional 12 “quid” in dividends over those years. Not bad, considering that we had in between Brexit, Covid 19, Ogden and what else. So I will certainly “not look back in anger”.
Sto 6M results (Peers, consequences)
Sto, my remaining “freedom insulation basket” play has released its 6M 2024 numbers last week and as already pre announced, they looked very bad:
Turnover was down -7%, EBIT however was down -50%. Management also canceled their 2025 goals and said investors will need to wait until Spring 2025 for new guidance.
The sales decline, partially caused by really bad weather in Q2 in Europe is not the surprise but the rather high operating leverage in my opinion. If we drill down one level deeper we can see that although even the Gross Margin increased from 52% to 54%, the other costs increased quite significantly. Especially personnel expenses increased by +3%. Together with the in absolute terms lower gross profit and higher depreciation, the -7% in sales then get leveraged to -50% in EPS.
Other players in the industry have done a lot better. Steico for instance had flat sales and an increasing EBIT:
Rectical could even grow organically:
and Rockwool, who has significant US exposure, really delivered great results:
Kingspan is more or less flat:
So overall, I clearly have chosen the worst performer in the first 6M 2024 among the peer group. Based on these results, it is also no surprise that the Sto Stock price has underperformed in relative terms as well:
To be honest, I still do not full understand why Sto has performed so badly. Yes, they might have more German exposure than the others, but even outside Germany, Sto shrinked by -5%.
Maybe they have even more exposure to residential new builts than I thought. The easy argument would be to blame the German Government for everything. And of course, the current Government with it’s very random “policies” and no real support is partly to blame.
Overall in my opinion the biggest culprit of the low activity however was the long period of ultra low interest rates that fueled a huge but unsustainable real estate boom in Germany. One result was that real estate prices went higher and higher which is nice if you own a lot of real estate but pretty bad for a young family with limitd equity who is not able to pay the mortgage rates. One of my mental models is: The longer the boom , the longer and deeper the bust. Unfortunately I forgot about that.
Another, less discussed aspect of the current situation is that for now, the job market is relatively strong. That means there are very little forced sales which in turn means that prices, especially in the attractive areas never really went down or there is just no activity.
A third and final aspect is that energy prices have come down significantly, so the motivation to renovate has maybe also faded compared to the year 2022 with sky high prices for Oil, Gas and everything else. The much talked European renovation requiremtns have been watered down so mcuh thatthey are barely relevant.
A small silver lining at the macro level could be that mortgage rates in Germany are actually starting to come down, but they are still at an elevated level:
Hopefuly that happens without a big increase in unemployment, which would clearly be not good for the construction industry.
One year ago, Sto would have been one of my highest conviction positions, because I was hoping for a decent recovery in 2024 supported by regulatory requirements. Now I am honestly not so sure anymore. Maybe we are now in the darkest part of the tunnel, but I have to say that Sto has disappointed me with their 6M performance.
Personally, I clearly made the mistake of overconfidence into a “thematic” investment. For the time being I will watch waht happens, for instance if they will do a capital markets day. I will certainly not buy more.
