RSA Insurance Group PLC (LON:RSA) is well placed to deliver against lower consensus market expectations as it undergoes a significant year of restructuring, UBS said upgraded its recommendation on the stock.
Last week the insurance group posted a 20.6% drop in 2018 underlying pre-tax profit to £492mln, missing the market forecast of £523mln, due to the impact of adverse weather costs and losses in the London Market speciality and wholesale business.
READ: RSA underlying profits drop on higher weather costs, London Market losses
However, RSA said it had taken actions to address the underperforming areas of the business and expects a “good recovery” in 2019.
UBS raised its rating on the stock to ‘buy’ from ‘neutral’ and lifted its target price to 600p from 550p.
The broker said that since its last note on RSA, consensus forecasts for earnings per share (EPS) in 2019-20 have fallen by about 4% while the stock trades at a 30% discount to its synthetic sum of the parts valuation.
UBS also noted that RSA has announced comprehensive remedial actions across the UK book.
An attractive entry point
“We now find RSA well placed to deliver vs. lower expectations; UBSe 2019-21E EPS is 2-10% ahead of consensus; we believe gradual delivery can help close RSA's execution discount.
“We see this as an attractive entry point to a stock with attractive assets, defensive characteristics, self-help and an improving dividend yield underpin.”
UBS said it attributes less execution risk to companies that are restructuring and shrinking to greater profitability than those seeking to grow.
It said 2019 represents a “significant year of restructuring for RSA” and thinks the company is well placed to deliver on the back of major re-underwriting, re-pricing and enhanced reinsurance purchasing.
“We also note UK household trends appear to be stabilising, and there is a pricing tailwind in the London Market,” UBS added.
Lower volatility should help RSA lift pay-out ratio
Earnings volatility stemming from the London Market business has sparked concerns around RSA’s ability to lift its payout ratio beyond the 40-50% target.
In that context, UBS thinks it is positive RSA has shed 50% of its London Market book and reinsured more out. The investment bank reckons lower volatility should help RSA lift the payout ratio.
“Execution is key here, but we expect remedial actions to kick in through 2019. Our 2019 dividend per share expectations are in line, but we're 3% ahead in 2020 and at an estimated 70% pay-out by 2023.”
Shares rose 1% to 527.2p in late morning trading.