Broker tips: Admiral Group, William Hill, Laird

Motor insurance company Admiral Group looks overvalued compared to peers, RBC Capital Markets said on Thursday as it reiterated an ‘underperform’ rating and cut its target price to 1,600p from 1,625p.

RBC reduced its profit before tax estimates for fiscal years 2017-18 by 8% on average, with dividends also cut by a similar level, following Admiral's first half results on Wednesday.

The broker said Admiral’s share price has benefited from improving UK motor insurance pricing, a shift towards defensive positioning in the sector and the search for dependable yield.

“Although we continue to see Admiral as a force to reckon with in UK motor, we continue to see risk reward in the stock skewed to the downside with Admiral trading at a material premium to UK motor peers,” RBC said.

“Despite tailwinds from an strengthening pricing in UK motor insurance, we reduce our estimates for Admiral's UK motor insurance business. This decline primarily relates to commutations which were well below our expectations at the first half results, coming in at £12.8m versus our £43.5m estimate.”

RBC said another area of surprise for Admiral in the first half was the decline in the Solvency II ratio, reflecting a drop in yields following the UK EU referendum vote which affected the ratio by 20 percentage points.

“If we mark to market the Solvency II ratio, we now believe it is in the range of 167%, still above the top of the 125-150% target range.”

William Hill’s shares fell on Thursday as Berenberg reiterated a ‘sell’ rating on the stock, saying a takeover by 888 Holdings and Rank Group for the company is unlikely to materialise.

The bookmaker on Monday rejected a revised takeover proposal worth more than £3bn from 888 and Rank. William Hill received a proposal from online gambling company 888 and casino operator Rank on 14 August after turning down an approach on 8 August.

“We believe the deal is extremely unlikely to materialise, which leaves the company short of potential suitors (on our numbers, it looks difficult to extract value from William HIll even assuming a very leveraged private equity acquisition),” said Berenberg.

The broker said reasons a merger probably won’t happen include a limited cash component, stretched financials, unclear synergies and a three-way deal burdened with execution risks.

Berenberg noted speculation of possible other bidders given William Hill’s “unique situation” with a temporary management team and the fixing of its digital division underway.

“We think these are far-fetched, as: 1) other industry players do not have the critical mass to acquire such a big target, and 2) a private equity fund would need to releverage William Hill very substantially (over 7x starting net debt/EBITDA) or offer a price below the current market price to generate a satisfactory IRR (10-15% in five years), according to our calculations.”

Berenberg raised its target price to 334p from 225p due to higher earnings estimates following the first half results. The broker increased its adjusted earnings per share forecast by around 2% for 2016-2018 to account for a lower tax rate guidance this year and a slightly more optimistic view of the digital re-launch.

Laird was under the cosh on Thursday as Berenberg initiated coverage of the stock at ‘sell’ with a 230p price target following the company’s first-half results.

“After reporting a weak first half, with profit before tax missing estimates by between 30-40%, the market seems to have shrugged off what we saw as a profit warning.”

The bank said that in order to meet consensus numbers, Laird must deliver an “exceptional” second half, which it struggles to see happening given headwinds facing the industry and business.

“These issues, compounded by the resignation of CEO David Lockwood yesterday, lead us to initiate with a sell recommendation,” it said.

Berenberg pointed out that consensus currently estimates Laird will generate about £80m of pre-tax profit this year, despite the first-half numbers showing pre-tax profit of only £16.4m.

As a result, Laird would have to deliver a weighting of around 80% for the second half, which the bank said it had never done before.

“We forecast Laird is heading into H2 2016E with a £14m PBT shortfall and believe the chance of recovering this is highly unlikely.”