Esure's low-risk footprint undervalued, says Peel Hunt

Esure's low-risk footprint looks undervalued, Peel Hunt said on Friday as it bumped the stock up to 'buy' from 'add' and nudged the price target up to 300p from 295p.

"A growing footprint and surprisingly benign claims inflation should support margins," said Peel, noting that the shares already appear to be factoring in a softening of the UK motor rate cycle. In addition, it argued that the stock looks undervalued at around 9x 2019 price-to-earnings - compared to a sector average of 11x - and a 7% yield.

"While the UK Motor rate cycle is now plateauing, we believe as long as the market remains disciplined and prices track in line with claims inflation, Esure will have continued room to grow its market share and build excess capital," the brokerage said.

Peel noted that the company's outlook is driven by its footprint expansion strategy and said it assumes that the 3m policy target by 2020 can be reached. The brokerage is comfortable the expansion is not materially changing the company’s risk profile, nor does it see any need for higher IT investment to generate growth.

Motor policy numbers are now 37% above 2013 levels, which was the year Esure last paused its expansion strategy as rates declined, Peel said.

"The only thing we believe that could bring Esure’s growth strategy back to a halt is a softening cycle, albeit, Esure has proven in the past that it can protect its portfolio while sustaining a high dividend payout in lieu of earnings growth."

At 1305 BST, the shares were up 2.6% to 227p.