Avivasa: Well-Run, Capital-Light Franchise with Growth Runway

Gokul Ponnuraj of Bavaria Industries Group presented his in-depth investment thesis on Avivasa (Turkey: AVISA) at European Investing Summit 2020.

Thesis summary:

Avivasa is Turkey’s leading pension and insurance firm. While Aviva Plc (40% shareholder) brings its global insurance expertise, the Sabanci Group (40% shareholder), one of Turkey’s largest conglomerates, brings with it the Akbank relationship, which provides Avivasa a huge distribution edge in the marketplace, along with embedded digital capabilities.

Avivasa’s pension business is Turkey’s market share leader (18.2%). The pension business is a capital-light asset management business with no underwriting or balance sheet investment risk. It generates strong, predictable fee income. The firm has grown pension AUM at a CAGR of 26% over the last five years. Avivasa’s insurance business has grown gross written premiums at a CAGR of 42% over the last five years as the firm got strong customer traction on its credit linked insurance and long-term dollar saving products. The firm is well-run, with best-in-class ROEs of 35% and a dividend payout ratio of 50-75%.

Insurance and pension penetration in Turkey is very low, and the firm has a long runway for growth in both business segments. The life insurance segment contributes 57% of the firm’s overall technical profits, while the pension segment accounts for the remaining 47%. Within the life insurance segment, the business mix split is 45% credit-linked insurance, 35% dollar return of premium business, and 25% other (personal accident, health insurance, etc).

The credit-linked insurance segment is a direct play on increasing retail credit penetration in Turkey, as the firm’s banking partner AkBank has one of the best mass-affluent customer franchises in the country. In emerging markets like Turkey that have high interest rates, it is extremely valuable to have a profitable long-tail liability franchise, especially when the only underwriting metric they need to get right is the mortality rate, which is non-volatile and hence no complex underwriting is required for the underlying risks.

The recent market cap to flow earnings (potential lifetime profits from products sold in 2019 alone) is only 5.5x. The shares recently traded at ~1.2x embedded value (crudely analogous to book value), and 10x IFRS earnings. The primary risks to Gokul’s thesis continue to be the worries around Turkey’s macro economy and potential currency depreciation.

Disclaimer provided by Gokul: “We are biased as we hold around 1.2% of the firm. We haven’t bought or sold Avivasa shares in the last 30 days.”

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About the instructor:

Gokulraj Ponnuraj is a value investor with a focus on small and mid-cap spinoffs and compounders with a bias towards emerging markets. He has been investing in the Indian markets for more than ten years and in global markets for the last three years. Gokul manages the public equities portfolio at Bavaria Industries Group. The firm uses its balance sheet assets (permanent capital) to invest in opportunities with an attractive risk-reward tradeoff. Gokul holds a Master in Finance degree from London Business School.

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