Broker tips: Direct Line, Close Brothers, eEnergy
By Iain Gilbert
Date: Friday 27 Jan 2023
(Sharecast News) - Analysts at Berenberg very slightly lowered their target price on insurance group Direct Line from 160.0p to 159.0p on Friday following the announcement of its quota share deal.
Direct Line announced a 10% quota share deal on Thursday, which it expects to add six percentage points to solvency and which will, in Berenberg's view, lead to earnings dilution of roughly 4%.
The German bank stated that the deal was "relatively minor" and did not fix the Direct Line's underlying issues or sufficiently address its thin capital buffer.
"However, it does fit the narrative of the company continuing to muddle through this turbulent time," said the analysts, who stood by their 'hold' rating on the stock.
"Direct Line's solvency is still precariously low: we estimate circa 151%. As a reminder, solvency was 152% at June 2022 and since then the company has de-risked its investment portfolio (+6ppt), cut the final 2022E dividend (+17ppt) and announced a 10% QS deal (+6ppt), but solvency is still only c151%. We do not think this is a good approach, but it does fit the narrative of the company muddling through. We now expect the company to pay an interim dividend of 7.6p to appease many income funds that would become forced sellers should a 2023E dividend not be paid; however, will still think Direct Line will not pay a final dividend. We estimate solvency will end 2023E at 166% under this scenario."
Peel Hunt downgraded Close Brothers on Friday to 'hold' from 'add' and cut the price target by around 18% to 1,031p as it lowered earnings per share estimates by 55% for FY23 and by 4% for FY24 and FY25.
"Our forecast changes reflect slower loan growth, weak Securities performance and - for FY23E - the impact of a further estimated £115m of provisions for the Novitas legal finance business," the broker said.
"Novitas charges are significantly higher than we had expected, and although we do not expect that additional impairment charges will be needed for these exposures, the 1H23 provisions should reduce the CET1 ratio by circa 80 basis points, from the 14.4% reported at December 2023, and the company's excellent long-standing reputation for conservative, disciplined lending has been temporarily tarnished."
Peel Hunt said the valuation is now supportive of Close Brothers shares at the current level. It noted that it has been de-rated to around 1x TNAV - it no longer maintains its historic premium - trades on a single-digit PE (for years after FY23E) and has a dividend yield of nearly 7%.
Analysts at Canaccord Genuity made a number of minor changes to its forecasts for eEnergy Group on Friday, stating it was approaching the firm with "cautious optimism" going into 2023.
Canaccord Genuity stated eEnergy continued to see "highly attractive market conditions", with its core offering of energy-efficiency-as-a-service presenting no capital cost to customers, experiencing "strong demand".
However, market changes, most notably to its third-party financing arrangements and lower upfront supplier payments in its energy management business, lead to higher cash consumption in the short term - as demonstrated by the group's issue of secured bonds in November.
"We are making a number of minor changes, primarily increasing our expected profitability in energy efficiency as eEnergy's book of demand for solar projects (and to a lesser extent EV chargers) increases rapidly, offset by lower growth in its energy management business as switching diminishes in a less competitive environment. We are also removing a non-cash amortisation from our adjusted pre-tax profit and earnings per share, and taking a slightly more cautious view on near-term cash. The net impact is a small EPS upgrade but only marginal changes to our EBITDA forecasts," said Canaccord, which reiterated its 15.0p target price and 'buy' rating on the stock.
"We continue to base our price target on 7.5x June 2024E EV/EBITDA, which we believe is a fair reflection of the risks for what remains a high-growth business with a differentiated business model in a sector experiencing secular growth."
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