Broker tips: Esure, Chemring, TBC Bank
Berenberg upgraded Esure to 'hold' from 'sell' and lifted the price target to 280p from 230p after the insurer agreed to be bought by Bain Capital for 280p a share in cash.
The bank said that given the significant premium offered and the lack of obvious potential counter-bidders, the offer is an "excellent outcome" for shareholders. It also said that with the backing of chairman Peter Wood and Toscafund, who between them own 47.7% of the shares, shareholder approval should be an easy hurdle to clear, while regulatory approval is not expected to be an issue.
"We believe Esure’s aggressive growth strategy will lead to worsening underwriting margins and significant capital strain. Indeed, this was demonstrated at its H1 results. With such strategic risks, exiting at a reasonable price is a good outcome, especially given the collapse in the shares over the past 12 months."
The bank does not reckon Esure will become the subject of a bidding war. "It has been widely rumoured that the company was up for sale for at least two years, with no bidders forthcoming. It is difficult to understand the strategic rationale for the acquisition, other than the favourable valuation.
"UK motor insurance is highly competitive, has a volatile pricing cycle and lacks growth. Hence, we do not think there will be significant demand for this asset from elsewhere."
Berenberg, which expects the deal to get regulatory approval before year-end 2018, said there is a risk that Bain could find something it does not like during further due diligence, such as a reserving shortfall. However, it noted that the private equity firm has already conducted a period of due diligence and was confident enough in the financials to submit a proposal to acquire the company.
Analysts at Barclays Research reiterated their 'overweight' stance on Chemring's stock following the tragic incident at the firm's countermeasures facility near Salisbury on 13 August.
Their updated estimates for the rate of growth in th company's earnings per share in 2018 to 2020 were -29%, +1% and +2%, respectively, but they believed the 12% drop in the shares on the day following the announcement had been an "over-correction".
Indeed, they believed it afforded investors with an entry point into a business with "strong" niche positions and self-help potential.
Changing hands on a 2019 price-to-earnings multiple of 15.0 and trading on an EV/EBIT multiple of 10.0, the shares did not look expensive, they said, adding that "these near-term multiples seem to overlook future self-help and mix improvement".
However, they did trim their target price by seven pence to 258p in order to better reflect on-going incident risk.
Analysts at Peel Hunt reiterated their 'buy' rating on TBC Bank on Wednesday, saying they were "confident" the Georgian banking group's underlying results would again highlight the consistency of its returns.
Having spoken with management across the bank's divisions, the broker said TBC was "well positioned" to continue serving the needs of the booming Georgian economy, as well as meeting the ongoing developments of banking.
Peel Hunt noted that TBC's long-term ambition of being the best digital financial services company in the region was evidenced in its ongoing innovation, particularly in the launch of Space Bank, its cloud-based, digital-only neobank.
In addition to maintaining its 'buy' recommendation, Peel Hunt also reiterated its 2,150p target price on the group.
Peel Hunt expects TBC's net loan book to grow to GEL 8.9bn (£2.67bn), while its first-half pre-tax profits estimate of GEL 210m (£63.22m) was 2% below consensus forecasts of GEL 213m.