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The Expert View: Legal & General, Capita and Merlin
Our daily roundup of analyst commentary on shares, also including Aldermore and Utilitywise.
by Michelle McGagh on Feb 18, 2016 at 05:00
Legal & General weakness is a buying opportunity
Insurers may have been hit hard by the market downturn but Legal & General (LGEN) is in the strongest position.
Barclays analyst Alan Devlin reiterated his ‘overweight’ recommendation and target price of 298p on the shares, which jumped 7.3% to 227.2p yesterday.
‘2016 has seen very extreme market movements, with all asset classes moving in the wrong direction for European insurers,’ he said.
‘UK insurers have the highest leverage and the stocks have therefore underperformed on concerns of potential credit losses. However, we believe there is one significant difference between UK insurers and their European peers – UK insurers reserve for credit losses upfront, and they have already taken the pain of future credit losses.’
He added: ‘As we go through the credit cycle, UK insurers will offset losses from their annuity portfolios against their credit default reserves, and earnings/dividends should not be impacted.’
Devlin believes Legal & General ‘is actually in the strongest position with a £2.3 billion default reserve on its £43 billion annuity portfolio’ and that any weakness in the share price ‘due to misplaced credit concerns is a buying opportunity’.
Aldermore to outperform all UK banks this year
Challenger bank Aldermore (ALD) is expected to outperform every other UK bank this year.
Investec analyst Ian Gordon retained his ‘buy’ recommendation and target price of 325p on the shares, which rose 2.1% to 187p yesterday.
‘We reaffirm our view that, in 2016, Aldermore should materially outperform every other UK bank in our coverage,’ he said.
‘It currently trades on a 2017 estimated price/earnings of 5.4x. [Yesterday’s] Council of Mortgage Lenders data confirmed solid buy-to-let activity for December, most notably in the remortgage segment which drives c.70% of Aldermore’s buy-to-let flow.
‘Our real frustration is that Aldermore’s detractors seem a little unsure as to precisely what it is that they don’t like, but on the issues of loan growth, net interest market, risk-weights, credit quality and value we have little concern.’
Capita needs contract wins to meet growth expectations
Analyst aren’t expecting any surprises when outsourcing giant Capita (CPI) reports its preliminary results but they will be focusing on contract wins.
Jefferies analyst Kean Marden retained his ‘buy’ recommendation but reduced the target price from £14.45 to £14.00. The shares rose 2.4% to £11.25 yesterday.
‘Capita will report prelim results on 25 February,’ he said. ‘We anticipate few surprises following the December interim management statement and will focus on two areas: after a slow start, contract wins are necessary for Capita to deliver consensus expectations of 5% like-for-like growth in full year 2016.
‘Return on invested capital is drifting towards the bottom of management’s 14-16% target range and payback on the new finance director’s initiatives is required.’
He added: ‘According to industry press, Capita recently reached settlement with Arch Cru [fund] investors but as precise details haven’t been disclosed we are unsure whether the group’s undisclosed provision is sufficient. Elsewhere, Insurance Age magazine reports the imminent sale of Capita’s Fish Insurance subsidy to PIB Insurance Brokers for an undisclosed sum.’
Merlin shares outperform the market
Alton Towers and Legoland owner Merlin Entertainments (MERL) has had a strong 12 months despite the rollercoaster disaster last year.
Numis analyst Ivor Jones retained his ‘hold’ recommendation and target price of 400p on the shares, which rose 3.1% to 427.8p yesterday.
‘Merlin’s share price has outperformed the market over the past year, despite the impact on profits and sentiment of the accident at Alton Towers in mid-2015,’ he said.
‘We believe this share price performance reflects the long-term investment attractions of the business in a turbulent market.
He added: ‘Merlin’s global consumer exposure and growth potential has delivered material outperformance for investors in the past year and we see no reason to chase the shares ahead of the results.’
Utilitywise predicted to rerate over next 18 months
There are short-term concerns around energy and water consultancy Utilitywise (UTW) but it is still expected to rerate over the next 18 months.
Liberum analyst Andrew Bryant retained his ‘buy’ recommendation and target price of 270p on the shares, which rose 1.3% to 174.3p yesterday.
‘Utilitywise has released a trading statement…which confirms that the company has performed in line with management expectations during H1,’ he said.
‘The two key features are an increase in the “go live” rate from the order pipeline and a faster rate of growth in new business compared to extensions. The valuation reflects concerns around profit and loss provisioning, cash collection and lower energy prices. However, delivery of forecasts and higher cash flow backing of earnings per share over the next 18 months should drive a rerating of the shares back to 200p+.’
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Look up the shares
- Capita PLC (CPI.L)
- Utilitywise PLC (UTW.L)
- Legal & General Group PLC (LGEN.L)
- Merlin Entertainments PLC (MERL.L)
- Aldermore Group PLC (ALD.L)