Berenberg upgrades DLG to 'buy', sees catalysts in 2024

Berenberg has upgraded its rating for motor insurance group Direct Line from 'hold' to 'buy', saying that the stock's current price presents a buying opportunity.

The broker has lifted its target price from 170p to 195p, leaving 15% upside from Monday's closing price of 169.5p.

"Investing in Direct Line is not for the faint-hearted, in our view; however, we believe the current valuation presents a trading opportunity and we see catalysts throughout 2024 that could support the shares," said analyst Thomas Bateman.

"There are risks and our estimates are below consensus, but this does not stop us being positive on the stock because even our more cautious estimates should be good enough for it to perform."

The shares have been weaker over the past week – along with Admiral – on worries that the FCA will force insurers to cut APR charges on premium finance, where customers choose to pay in monthly instalments for a fee. However, Berenberg doesn't see this as a big risk to Direct Line.

The broker doesn't forecast a dividend to be paid at the time of its 2023 results, but reckon share buybacks will be possible later in 2024 and in 2025. These, Bateman said, will be "essential" to help offset the earnings dilution from the disposal of the brokered commercial insurance business which the company announced it was selling to RSA in September 2023.

The stock, was was up 1.1% at 171.45p by 1107 GMT, trades at just 8.7 times 2025 estimated earnings.