Jefferies International put the boot into Beazley PLC (LON:BEZ) shares on Thursday, downgrading its rating for the mid-cap Lloyds of London insurer to ‘hold’ from ‘buy’ saying it is time to take profits after a “surprisingly euphoric reaction” to last week's results.
The US bank also trimmed its target price for the FTSE 250-listed stock to 611p from 616p. In morning trade, Beazley shares were down 3% at 565p.
In a note to clients, Jefferies analysts said: “Although Beazley's margins are on the road to recovery, it seems to us that following the dramatic reaction to 2019 results, consensus may be underestimating the length of the road left to travel.
“Thus, although we envisage a >3%pts improvement in the combined ratio over 2020-2022 to 92%, the market expects nearly 5%pts to <90%, leaving us 8%-11% below consensus and compelling us to downgrade to Hold.”
The analysts said that, in their view, Beazley's shares now appear fairly valued at 16.9x 2019, 16.5x consensus 2020 forecasts and 12.9x consensus 2021 forecasts.
They added: “Although its closest peer (Hiscox) still trades at considerably higher multiples, we note that this reflects the remarkable management actions Hiscox has taken, which are depressing near-term earnings.
“Comparing Beazley instead to Hannover Re, a similarly low yielding, high growth P&C (Re)insurer, the valuation appears in line at 16x-17x P/E.”
2020 outlook dull
The Jefferies analysts also pointed out that 2020 is already shaping up to be a less than ideal year for the Lloyd's market, with potential losses arising from the ongoing epidemic in Asia.
Most notably, they added, Beazley highlighted that there is exposure through the contingency book, where although losses are capped with reinsurance to $25mln, this claims retention still equates to 10.2% of our forecast for 2020 profit before tax.
The analysts concluded: “Given that the Chinese Grand Prix has now been cancelled (alongside other events), it is at least feasible that this limit is reached.”