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Broker Spotlight

Broker Spotlight brings some of the more intriguing and topical analyst coverage to centre-stage. The daily column aims to illuminate thoughts and opinions behind the big stories. London is one of the financial capitals of world. The influential and closely followed views of its analysts regularly move markets and split opinion. The Broker Spotlight column arms Proactive readers with the added insight from the often colourful thoughts and headline-grabbing valuations from the City’s analyst community.

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Broker round-up: Admiral, Aviva, Anite, Sage, Home Retail, Dixons, Lloyds Banking

March 11 2013, 11:42am

Bank of America Merrill Lynch has downgraded Sage (LON:SGE) after the accountancy software giant’s recent good run on the back of a share buyback programme.

Welcome though the share buyback initiative may be, Merrill Lynch worries that Sage cannot keep up the pace of buybacks without affecting the stock’s liquidity.

The broker thinks the key driver for the stock henceforth will be the company’s ability to execute on its strategy to build a robust Cloud product portfolio.

“Although the move to the Cloud is the right strategy, we believe, this is [a] slow process and [we] do not anticipate imminent positive catalysts,” the scribblers at Merrill Lynch warn.

“Historically very few on-premise companies have successfully transformed themselves into Cloud players. In this context the market will remain cautious on the success of this transformation at Sage until the company demonstrates a few quarters of consistent performance with its new Cloud product launches,” the broker reckons.

Admiral’s (LON:ADM) premium rating is set to be dented further due to weak prospects in the UK reckons broker Berenberg, which has kept the motor insurer as a sell.

According to the broker, Admiral’s profitable growth in the UK is over. The insurer grew its UK vehicle count by only 2% in 2012, while the second half saw a decline.

The flow of Sage customers switching to the Cloud offering is just a trickle at the moment and Merrill Lynch reckons it will be a few years before it rises to a torrent, giving plenty of opportunity for competitors such as SAP to muscle in.

The broker has downgraded the shares to ‘underperform’.

Berenberg puts this down to a lack of growth by price comparison websites and the increase in competition in Admiral’s target market; headwinds it expects to be similar, if not become more severe, in 2013.

Admiral’s average premium fell by 9% across 2012, mainly due to price reductions. This will affect the 2013 loss ratios with further price reductions in 2013.

Admiral’s business model relies on it being able to renew its reinsurance treaties on the current very favourable terms. As the combined ratio gets closer to 100%, Berenberg believes this will become more and more difficult.

Last year’s earnings (2012) were a peak in the broker’s view and reckons that the stock’s de-rating from the last few years will continue.

Elsewhere in the insurance sector, Aviva (LON:AV.) sees its price target lifted to 350p from 330p by Bank of America Merrill Lynch, after a bit of a change in heart on the part of the US broker.

Merrills cut Aviva’s price target last week following the insurer’s results, and Monday’s change has not restored the price target all the way back to where it was. The broker retains its neutral stance but suggests that the insurer is “on the road to redemption”.

Fellow US broker Citi has cut its price target for Aviva from 479p to 432p, while retaining its ‘buy’ recommendation.

Third quarter results from Anite (LON:AIE) on Monday prompted Investec to downgrade the stock, even though the broker’s estimates have been left unchanged.

Anite indicated full year figures will be in line with expectations, hence Investec’s decision to stand pat with its numbers.

“However, the tone is incrementally cautious, commenting that Q3 returned to being a typically quiet period as customers release budget slowly at the beginning of the calendar year. This means an increased weighting to Q4, with a strong performance in the Handset division [is] required,” according to Investec’s James Goodman.

Investec sticks with its target price of 157p, which is based on a sum of the parts valuation, but moves from ‘hold’ to ‘buy’.

Panmure Gordon also picked up on the caution tone in the Anite statement, specifically the assertion that group revenue and adjusted profit before tax in the nine months to the end of January were “broadly in line” with management’s expectations.

“The ‘broadly’ qualifier normally means that something has gone awry and, indeed, we learn customers have been ‘taking time to release budgets at the start of the calendar year’. As the critical Handset business is normally backend weighted we feel that underlying message is that Anite is commenting that it has sales pipeline - but there might be risk to execution,” Panmure’s George O’Connor speculates.

Nevertheless, the broker sticks with its ‘buy’ recommendation and 170p price target.

Merrill Lynch is one of the few remaining advocates of Home Retail (LON:HOME) in the broking community. While others abandon the Home Retail ship because of concerns about online competition and the grocery chains moving in on Argos’s turf, Merrill Lynch stands by its ‘buy’ recommendation.

“We think Argos’s improving ‘click and collect now’ offer can coexist with Amazon’s best in class ‘delivery to home’ offer, while UK supermarkets are following the French in focusing more on food than non-food sales,” the broker asserts.

Home Retail, which also owns B&Q as well as Argos, is set to release an interim management statement on Thursday which Merrills thinks “should show further evidence of Argos's improved offer and benefits from exposure to tablets and capacity withdrawal.”

Meanwhile, the retailer’s China exit and lower freight costs should offset a strong US dollar gross margin headwind.

The broker is forecasting profit before tax of £95mln for the year to the end of February 2013, which it reckons is about 3% above the market consensus.

While Home Retail is largely unloved, resurgent consumer electronics retailer Dixons Retail (LON:DXNS) remains flavour of the month at Deutsche Bank, as it reaps the benefit of the collapse of Comet in the UK while sharpening its pricing policy to fend off competition from the Internet.

“On management’s analysis Currys’ prices were just 6% ahead of Amazon by November versus 18% just 18 months ago. Our own price benchmarking suggests Currys pricing is already closer still – indeed better than Amazon on many individual lines. Both pricing and availability of the latest models also appears better than other key store-based competitors such as Argos,” the broker avers.

“If the company can successfully restructure or dispose of its loss-making PIXmania and Southern European operations then our Bull Case scenario suggests the stock [is] worth 59p on a two year view,” Deutsche duo Charlie Muir-Sands and Warwick Okines write.

Deutsche has bumped up its price target to 36p, as it now assigns a one-in-five chance of a successful disposal of Pixmania and the Southern European operations.

Bank of America Merrill Lynch’s scribes have turned more bullish on prospects for state-controlled Lloyds Banking (LON:LLOY) with dividends confidently now in the picture it adds.

Rising net interest margin, core loan growth, falling costs and a further significant reduction in bad debt, point to earnings per share of 8p by 2015 suggests the broker.

With PPI behind it and the capital path clear going forward, Merrills says it feels confident enough about Lloyd’s future to put dividends back into its estimates [from 2014].

Its target price rises 5p to 70p and the stance is ‘buy’.

Societe Generale, meanwhile, has reiterated its ‘buy’ rating for the partly nationalised lender.

“The most impressive part of Lloyds’ balance sheet restructuring, in our view, is that its non-performing loans are down 30% from their peak,” SocGen states.

“There is strong evidence that its bad assets are marked appropriately,” the French broker asserts, adding that with more certainty around non-core asset valuations, “the 16% return on tangible equity core business becomes the key driver of valuation.”

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