The Motley Fool

Why I’m bullish on Personal Group Holdings plc despite today’s profit warning

Shares in employee benefits and insurance provider Personal Group (LSE: PGH) have fallen by around 3% today after it warned on short-term profitability. It expects a one-off adverse impact to its 2017 results from uncertainty surrounding its Let’s Connect business. While this could mean that its profitability is less impressive than anticipated, now could prove to be a buying opportunity for the long term.

An uncertain period

The uncertainty in the Let’s Connect business stems from an HMRC review of salary sacrifice. While the results of this were announced in the latter part of the year, the uncertainty beforehand caused a proportion of employers to delay contract decisions for Let’s Connect. Although it represents a relatively small proportion of group profit, by its nature it represents a bigger chunk of group sales.

Therefore, it seems likely that Personal Group’s overall sales and profitability will be negatively impacted by the changes in the current year. However, now that the Autumn Statement has clarified the government’s position, sales for Let’s Connect are expected to be largely unaffected over the medium term. In fact, it recently signed a significant contract with the Royal Mail, while a survey of over 4,000 end users highlighted that the changes to salary sacrifice didn’t impact on the appeal of the company’s services.

Strong underlying performance

The underlying performance (excluding one-off items) of Personal Group in 2016 was encouraging. Profitability for the year was marginally ahead of expectations. This reflects the continued strength of the core insurance business, which saw its fifth consecutive year of record sales.

Similarly, the company’s technology platform Hapi has opened up new opportunities for growth. It has increased Personal Group’s available market in the private sector by 15.7m employees to 26.2m. It’s now well positioned to service over 85% of the UK working population, which should lead to growth opportunities over the medium term.


Looking ahead, Personal Group is forecast to record a rise in its earnings of 67% in 2017. When combined with a price-to-earnings (P/E) ratio of 16.1, this equates to a price-to-earnings growth (PEG) ratio of only 0.2. This indicates that there’s a wide margin of safety on offer, which means that even with the negative impact of the Let’s Connect business factored in, Personal Group has strong capital gain prospects.

Similarly, insurance sector peer Prudential (LSE: PRU) could be a star performer in 2017. It’s forecast to record a rise in its earnings of 14% this year, which means that it has a PEG ratio of 0.9. While this is higher than the PEG ratio of Personal Group, Prudential offers far greater diversity, lower risk and a more solid financial footing through which to deliver more growth over the coming years. In addition, it operates in a wide range of geographies, notably in emerging markets where growth in financial services products is likely to rise.

Therefore, Prudential seems to have more appeal than Personal Group based on the risk/reward ratio, although the latter remains a sound long-term buy.

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Peter Stephens owns shares of Prudential and Royal Mail. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.