German broker Berenberg has upped its target price for insurer Aviva PLC (LON:AV.) but repeated a ‘sell’ rating on the stock in a note to clients entitled ‘Squeeze until the pips squeak’.
Berenberg analyst Trevor Moss has raised the target price for the FTSE 100-listed stock to 456p from 440p, reflecting a share buy-back move, albeit with the stock trading at 512p, down 0.4%, or 2.0p in early morning trading.
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Moss said: “When we first heard talk of a share buy-back we thought it might be a joke, but apparently not.
“It seems to us to be designed primarily to boost sentiment when the company should be focusing on strengthening the balance sheet further, paying down debt and investing in the operations.”
He added: Given the lack of growth potential in Aviva’s business and an increasing squeeze on profits, we suspect that this means we might be heading for another acquisition.
“Given a lack of leverage capacity or spare cash, this leads us to think we are headed towards the issue of yet more shares. We would prefer to be invested in possible targets.”
Moss said, in his view, Aviva’s balance sheet is “overleveraged, lacks tangible equity and reserve prudence appears to be diminishing.”
He added that the insurer’s “operating profits have been considerably flattered by lower reserving prudence, assumption changes as well as other management actions.”
And, the analysts, said he thinks the company has “very limited organic earnings growth prospects as evidenced by ongoing net outflows in its life business.”