Broker tips: Reckitt, St James's Place, Direct Line

29th Feb 2024 15:32

(Sharecast News) - Analyst at RBC Capital Markets lowered their target price on consumer goods company Reckitt from 7,500.0p to 7,000.0p on Thursday but reiterated their 'outperform' rating on the stock, stating it was currently "bruised but undervalued".

RBC Capital said there was "a decent business" trying to be heard at Reckitt, but noted that right now it was not getting much airtime. Unlike previous hiatuses, Reckitt's "trade-spend reporting anomaly" cannot be attributed to circumstances outside the company's control and has dented the bank's confidence in the firm.

Reckitt recently identified "an understatement of trade spend in two Middle Eastern markets related to the fourth quarter and prior quarters of 2023. Following an investigation, Reckitt concluded "a small group of employees" had acted inappropriately and as a result, full-year net revenues were £55.0m lower than previously expected.

"That said, it does make sense that this was an isolated incident, if only because it seems to have been so inept on the part of the culprits. They were always going to be found out. We believe Reckitt is meaningfully undervalued and that this will not persist indefinitely, whether it's the stock market or some other investor that resolves it," said RBC. "We appreciate that Reckitt is the progenitor of this latest misfortune, but can't help thinking that if we're right and at the heart of Reckitt there's a business with good brands in good categories being competently managed, this undervaluation cannot persist indefinitely."

The Canadian bank noted that it couldn't say whether the mechanism of resolving this undervaluation would be the shares' re-rating on the back of less accident-prone financial results or the emergence of a trade or financial buyer, but it stated it was "not inclined" to describe Reckitt in 'value trap' terms and, consequently, expects the gap with its target price to narrow, leading to it also reiterating its 'outperform' rating on the stock.

Citi has upgraded its stance on St James's Place after a collapse in the the financial advice company's shares this week, saying that the "potholes have been filled".

The bank lifted its rating from 'neutral' to 'buy', saying that the valuation is now "too compelling to continue to ignore".

SJP shares have fallen 60% over the past year as a result of multiple fee reductions, a rebasing of the dividend and past service provisioning.

On Wednesday, the stock dropped 18% after the company's full-year results revealed it was putting aside £426m in compensation linked to the "historic evidencing and delivery of ongoing servicing".

"We see the FY'23 results as a clearing event as SJP, under a new CEO, has now addressed regulatory risk (lower fees, past servicing provisioning and no cash margin) and capital return," Citi said. "In many ways the bear case has played out and we can't ignore the dent to its track record but with expectations now re-set, there is a lot of bad news priced in. We upgrade to 'buy'."

Belgium's Ageas would need to make an offer of 270p to 300p a share for UK insurer Direct Line for it to be more likely to be accepted, Jefferies said in a note on Thursday.

Direct Line confirmed on Wednesday that it had rejected a £3.1bn takeover approach from Ageas, saying it "significantly" undervalued the group.

The terms of the "highly conditional, non-binding indicative proposal" comprised 100.0p in cash and one new Ageas share for every 25.24 Direct Line shares. As of closing on Tuesday, this implied a value of 233.0p per share.

Jefferies, which has a 210.0p price target and 'buy' rating on Direct Line, said the 270.0p to 300.0p per share range would be more in line with recent M&A valuations in the sector.

"We believe such a deal could be a good strategic fit and would be likely to deliver material synergies, whilst not being problematic from a regulatory point of view," the bank said.

Based on its forecasts, Jefferies said a 233p share price implies a 10.6x 2025F price-to-earnings multiple, which would be a discount to recent UK personal lines insurance deals. It noted that Bain acquired Esure in 2018 at a circa 12x one-year forward P/E multiple, while Sampo bought Hastings at around 14x.

"Thus, a proposal would more likely be accepted if the valuation were greater than 270p, implying a 12x 2025F P/E multiple," it said.