Shares in insurance company Hastings Group Holdings plc (LON:HSTG) have gained today after Credit Suisse initiated the stock with an ‘outperform’ rating, saying it has strong growth to drive capital returns.
Credit Suisse, which issued a target price of 290p for Hastings, said it expects improvement in operating earnings and “double-digit” dividend growth over the medium-term.
Hastings, which supplies car and house insurance, is targeting a policy count of three million by 2019, compared to 2.34mln in fiscal year 2016.
“We view this target as comfortably attainable, aided by motor industry pricing tailwinds and with 6.5% in-force share converging with 12% new business market share,” Credit Suisse said.
Credit Suisse also anticipates strong cash flow growth, driven by lower debt and a decline in capital expenditure.
However, the broker said key risks include: “1) slower-than-expected motor industry rates rises, 2) higher-than-expected claims inflation, 3) slower-than-anticipated progress on debt reduction and 4) regulatory risk.”
On 2 March, Hastings reported a 5% increase in 2016 operating profit to £132.1mln, as it increased customer numbers and market share. However, its results included a one-off pre-tax charge of £20mln after the Lord Chancellor's recent cut to the Ogden discount rate used for calculating personal injury claims to minus 0.75% from plus 2.5%.
While this is expected to lead to a rise in payouts, chief executive Gary Hoffman said it did not see a material impact on 2017.
Shares in Hastings rose 3.56% in morning trading.
In contrast, sector peer Esure Group plc (LON:ESUR) received a downbeat note from Citgroup, which downgraded the insurer to ‘neutral’ from ‘buy’ with a target price of 235p.
Citigroup said Esure’s shares are now fully valued after a strong performance in the year to date.
“Still positive on growth but little scope to outperform— the company is targeting growth of 15%-20% for fiscal year 2017 and we believe that it will be stretch to exceed the upper end of the range,” the bank said.
“We forecast premium growth of about 16.5% driven by: i) Favourable motor pricing; ii) Growth through aggregator websites; and iii) Expansion of the product footprint.”
Citigroup cut its 2017 earnings per share estimate by 1%, citing a weaker outlook on home insurances policies. The housing market is expected to soften this year due to a shortage of homes for sale and the uncertainty surrounding Brexit.
Esure, which completed the demerger of the Gocompare.com price comparison website in November, saw its underlying profit after tax increase by 18.0% to £80.5mln in 2016. The profit was boosted by a 19% increase in gross written premiums to £655mln.
The company said the recent cut to the Ogden discount rate had a limited impact as the firm had already included an allowance for a rate of 0%.
Shares dipped 0.46% to 238.90p in morning trading.