Citi put a dent in Aviva PLC (LON:AV.) shares on Tuesday after downgrading its rating for the FTSE 100-listed insurer to ‘neutral’ from ‘buy’ after cutting its target price by 10%.
In lunchtime trading, Aviva shares were 0.2% lower at 402.30p, with the US bank’s target price reduced to 414p from 460p primarily driven by around a 1% increase in cost of capital for those of its businesses it values on a discounted cashflow (DCF) basis - UK Life, UK GI, Canada and Asia.
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In a note to clients, Citi’s analysts said: “This reflects our view that the market’s focus is increasingly focusing on cash and capital returns vs. IFRS earnings. We also lower our assumed PEs for France and Italy by 0.5x as the higher proportion of traditional reserves in these countries leaves them most exposed to the low interest rate environment.”
They have also updated their earnings forecasts for the insurer to reflect new management guidance/targets from the recent Capital Markets Day, with 2019 operating earnings per share estimates decreased by around 2%, and 2020 and 2021 operating EPS estimates reduced by around 4%.
The analysts pointed out: “Understanding value creation at insurance companies continues to evolve as cash and capital generation disclosures shift the balance away from IFRS earnings.
“Aviva’s pivot to these metrics reassures on the dividend but highlights greater upside at peers that also have more diversified businesses with stronger competitive positioning.”
They concluded: “We downgrade our recommendation to Neutral with execution against plan also likely to take some time.”
“The shares trade on 1.2x S2 equity for an aspirational 12% ROE which looks full versus European peers given a) work still to do, b) higher leverage, c) less earnings diversification and d) Brexit risks,” the analysts added