By Iain Gilbert
Date: Tuesday 12 Nov 2024
(Sharecast News) - Jefferies downgraded Direct Line on Tuesday to 'hold' from 'buy' and cut its price target on the stock to 165.0p from 235.0p, stating the industry-wide turn to deflation meant that the time to raise prices ahead of inflation without materially contracting the policy count has now passed.
"As we expect Direct Line's new management to remain prudent and hit target margins (as widely expected), we see the upside opportunity as limited, while continued policy count contraction is a risk," said Jefferies.
Jefferies noted that over the past year, its view has been that when rising prices are overtaking claims inflation, a rising tide would lift all boats - i.e. that market-wide profitability would recover.
While this remains the bank's base case, it said that management's comment that Direct Line "experienced a higher level of large bodily injury claims" in the third quarter is a concern, even though guidance has been reiterated.
Jefferies also said that looking ahead to 2025, prices across the industry were falling, even though claims inflation was only decelerating, leading it to suspect that the shift in pricing reflects the pivot to growth seen at Admiral and Hastings.
"This presents a problem to Direct Line, because the days of being able to raise prices faster than inflation without losing too many in-force policies is now at an end. In our view, the new management are prudent, meaning that they will continue to price at a level that allows them to maintain the target profitability (13% net insurance margin), compelling Direct Line to shed policies."
Deutsche Bank has lowered its target price for Morgan Advanced Materials from 320.0p to 295.0p after the carbon and ceramic materials maker lowered its guidance last week.
In a third-quarter update on 5 November, Morgan Advanced Materials said market conditions had weakened during H2 and FY sales were likely to rise by just 3% at constant currency, compared with previous guidance of the top end of the 4-7% range. Meanwhile, additional FX headwinds mean the adjusted operating profit margin would be around 11.4%, down from a previous target of 12.5%.
Deutsche Bank pointed out that, despite the weaker full-year outlook, the stock has risen 3% since the update - most likely because of the news of a £40.0m share buyback announced alongside last week's update, which "suggests some investors are starting to look through near-term trading and sense a trough in expectations has been reached".
"While we have some sympathy with this view, we retain our 'hold' rating on the shares for the moment," the bank said.
Deutsche Bank slashed its earnings per share forecasts for this year and the next by 14% and 11%, respectively, partly due to recent order deferrals from MGAM's silicon carbide customers, where margins are high. Meanwhile, the bank said the "speed and extent to which second half expectations have reduced makes us nervous regarding momentum entering 2025".
Citi said in a note on Tuesday that a recent site visit at Melrose Industries' Western Approach highlighted "a number of industry-leading technologies".
The bank, which has a 'buy' rating on the stock, said that perhaps most interesting for investors was the presentation on additive manufacturing.
"The CTO's comments underscored the company narrative that this is a key area of opportunity with potential for significant return (more than 20% IRR)," Citi said.
"On Structures, we were incrementally reassured that Melrose has generally retained and invested in Structures business where they have embedded IP, leading manufacturing technologies, and can achieve their targeted margin."
Citi said it remains "high conviction" on the mid-term cash flow and believes this will be the main share price driver, but that Monday's visit was encouraging in highlighting "the underappreciated strengths of the Structures business, as well as the market opportunities the company is positioning itself to capitalise on, in particular within additive manufacturing".
Analysts at Berenberg raised their target price on Pan African Resources from 34.0p to 45.0p on Tuesday after the group announced that it had agreed to acquire Australia's Tennant Consolidated Mining Group.
Pan African Resources will acquire TCMG for $54.2m, split between an initial cash investment of $3.4m, with the balance due in PAF shares. Berenberg noted that first production from the group's Nobles gold project in Australia was expected in Q225 and has calculated an all-in sustaining cost of $1,242 per ounce, which, given a high gold price of roughly $2,610 per ounce, points to "attractive margins".
The German bank, which reiterated its 'buy' rating on Pan African, expects the site's potential life to be extended to eight years, roughly 100,000 ounces of gold per year, approximately 10,000-15,000 tonnes of copper, and "other upside opportunities".
"We update our model for the TCMG transaction, which is due to close on 18 December, plus our revised gold price deck. We calculate a valuation of the acquisition of $71.0m," said Berenberg. "While the jurisdiction was not expected by the market (given that PAF has focused on Africa as its core market), we think the deal is sensible, and uses its paper as a currency when the shares are at their highs. We also think that as PAF integrates the assets into its business model, more upside will be realised."
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