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Broker round-up: Legal & General, Just Retirement, Ladbrokes, Victrex, Circle Oil ...

Broker round-up: Legal & General, Just Retirement, Ladbrokes, Victrex, Circle Oil ...

Budget themes dominate today’s broker comment, with the City still reeling a little from the hammering yesterday for pensions, life groups and bookmakers. 

Shares in pension annuity providers tumbled yesterday as George Osborne thundered that no one in future needed to buy an annuity when they retire.

RBC crunched the numbers and today forecast the individual annuity market could shrink by 90% as a result of the proposed changes, while profits from the bulk annuity market could shrink by 30%.

Legal & General (LON:LGEN) is the most exposed to annuities, it adds, with its retirement division providing 29% of cashflow.

“Pricing is so favourable for annuity writers at present that we estimate that 40% of L&G’s annuity cashflow in 2013 is from annuity business written in 2013.”

While this cash will not fall away sharply as annuity cashflow is the combination of several years of sales, it could fall by 8% in the first full year post the Budget changes. As a result L&G is downgraded to ‘underperform’.

Nomura adds that the heavy share price falls for annuity specialists Just Retirement (LON:JRG) and Partnership Assurance (LON:PA) was overdone, though both took another beating today. 

“Even in the event of zero new business, the back-book of business for both companies should generate earnings, which does carry value.”

“We believe the insurance industry should adapt to the changes by offering innovative products as alternative to annuities, while  the tax changes (with consumers acquiring their  pension pots more easily) should entail more savings in the UK pension market, which is  catered for by insurers.” 

In terms of relative market shares/strategy focus, Prudential (LON:PRU) and Standard Life (LON:SL.) are relatively better placed, it adds, due respectively to strength in Asia and a strong pensions presence. 

Bookmakers were another major casualty of the Chancellor’s tax changes.

Citigroup does not see any respite for Ladbrokes (LON:LAD), which remains a ‘sell’, adding it sees a dividend cut as unavoidable at this point.

It has also reduced its earnings forecasts for William Hill (LON:WMH)  and Paddy Power (LON:PAP) but says these two have strong online businesses that insulate them from the hike in the tax on shop-based fixed odds betting terminals (FBOTs).

UBS, meanwhile, said it can’t rule out further regulation protecting problem gamblers as the government had previously indicated that any changes to FOBT regulation would happen after the results of the Responsible Gambling Trust study have been published  in the autumn. 

In contrast to Citigroup, UBS adds it is not worried about Ladbrokes' dividend despite the tax change given that cashflow would still cover the payment and there is adequate debt covenant headroom if required. 

Elsewhere, Citigroup is more upbeat on prospects at speciality plastics group Victrex (LON:VCT).

The US broker sees Victrex delivering a significant upturn in volume growth after two years of stagnation as developed market recover.  

Earnings estimates have been raised for the next three years and the price target is now 2,100p from 1,550p.

Smiths Group (LON:SMIN) remains on ‘underperform’ at RBC after the results yesterday and the broker says it is not confident that the pressure has eased on market forecast.  The new price target is 1,150p down from 1,200p.

Elsewhere, Investec maintained a ‘buy’ rating on oil group Circle Oil (LON:COP) with a price target of 50p. 

“Production performance in Egypt and Morocco encouragingly continues to trend as expected. Moroccan drilling has however been frustratingly delayed by flooding, but we expect this 12 well campaign to get under way in April or early May. “

Northland says Arian Silver’s (LON:AGQ) turnround is on track.  The refurbishment of its own plant at the 100%-owned San José Project expected to be complete in late 2014. This will significantly reduce costs and increase production to levels three times that of each of the company’s previous toll milling operations. 


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