Deutsche Bank has slapped downgrades on St. James’s Place PLC (LON:STJ), Standard Life Aberdeen PLC (LON:SLA), and Hargreaves Lansdown PLC (LON:HL.) as part of a wider negative turn on the European insurance sector.
St James’s, which the bank downgraded to ‘Hold’ from ‘Buy’, had an “under-recognised earnings risk on the downside” in the event of a no-deal Brexit or in the event of a more radical UK government.
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“SJP screens less well than some of its UK life assurance peers –with up to 20% further downside relative to our preferred stocks. The driver of this is the group’s high gearing to any slowdown in gross sales growth” the bank said.
Analysts also cut their target price for the firm to 1,090p from 1,280p, saying that while the shares offered 15% upside potential at the new price, there were “cheaper UK shares in whom the downside surprise is better reflected”.
Standard Life marred by “persistent” outflows from high-margin funds
Standard Life was also downgraded to ‘Hold’ from ‘Buy’ and had its target cut to 295p from 405p on the back of the same market and political risks in the UK, although Deutsche added that SLA was also “bottom-up headwinds in the form of persistent net outflows from some of its highest-margin funds”.
“Forecast downgrades over the last year have largely been driven by persistent net outflows from equity funds and [Global Absolute Return Strategy], which we believe have accelerated in recent months. We now estimate equity net flows at -18% of start-year [fund under management] in 2018e (vs -15% annualised at the 1H), and GARS flows at -42% (vs -23% at the 1H).”
However, the bank added that despite the outflows SLA’s dividend “should nonetheless be sustainable” if the company sold its stake in HDFC Life, its Indian joint venture, which carried a value of £2.6bn.
“If this were sold and the proceeds used to buy back shares, it would lift 2020e cash flow dividend cover from 0.8x to 1.35x.”
Hargreaves cut to ‘Sell’ as Brexit dents outlook for “significant” quarter
Completing the downgrade trifecta, Hargreaves Lansdown was knocked down to ‘Sell’ from ‘Hold’ with a target price cut to 1,500p from 1,900p.
The bank said the upcoming exit from the EU in March was “significant” for HL as the first quarter of the year is “usually the busiest” due to the end of the UK tax year in April.
Due to lower markets in the last quarter of 2018, Deutsche cuts its 2020-2021 revenue forecasts for HL by 12%, adding that “as the business is operationally geared we expect the Group cost ratios to deteriorate from c.18.2 [basis points] in FY18 to c.19.3bps in FY19. Consequently, we are reducing our [earnings per share] estimates by c.15% for FY20-21e”.
The bank also said that with HL facing “a potentially slower net inflow rate (due to weak investor sentiment) and slower earnings growth (operational leverage)”, the stock had “less upside potential than peers if markets normalise and substantially greater downside if they don’t”.
In mid-morning trading Monday, St James’s shares were down 0.74% at 963.8p, Standard Life was down 1% at 259.1p, and Hargreaves was down 1% at 1,877p.