Monday, April 30, 2007

RBC CM Initiates Coverage of Manulife at Top Pick

RBC Capital Markets, 30 April 2007


We are initiating coverage of Manulife with a Top Pick, Average Risk rating on its shares.

Investment Opinion

• We believe that Manulife deserves the premium valuation it trades at compared to Canadian financial services companies and life insurers worldwide, based on the company's sales and earnings growth track record, excess capital holdings, growth prospects in Asia and the U.S., and lower credit risk profile than U.S. lifecos and Canadian banks.

• Diversity of operations limits downside earnings risk and reserves appear conservative, with large provisions for adverse deviations relative to reserves and a track record of booking experience gains. The company is well positioned to benefit from rising long-term interest rates and a flat to down Canadian dollar.

• Valuation. Our 12-month price target of $47 is a combination of our P/E, price to book and embedded value methodologies. Our P/B target of 2.8x in 12 months is at the high end of our target for lifecos given a higher expected ROE than average. Our target P/E multiple of 14.5x 2008E earnings is above the company's 5-average forward P/E to reflect potential benefits from higher interest rates, rapidly growing value of new business and a more accommodating currency conversion environment, partially offset by deteriorating credit quality, uncertain equity market performance and lack of benefits from transformational acquisitions. Our target multiple on embedded value of 2.0x is higher than for the other two Canadian lifecos, reflecting higher prospects for growth in value of new business, because of the company's positioning in Asia and the U.S.