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Motor insurer’s update receives mixed reactions with Numis’ Johnson concerned by the high valuation
by Carlo Svaluto Morelo
An update from motor insurer Admiral was met with mixed reactions by analysts. Having shed more light on near-term prospects, Andrew Crean of Citigroup upped his recommendation from ‘hold’ to ‘buy’ saying that he had previously ‘under-clubbed’ his 2008 earnings estimates, and following the recent fall in the share price from £10 to £8.
However, in a reverse move, Nick Johnson, an analyst at Numis Securities, has confirmed that he is mulling a downwards shift of his target price for the shares – currently at £11.80 – due to the current tough trading conditions.
This is after the update confirmed that premium rates growth is slow, putting new business margins under pressure, but that the number of policies sold is increasing, which should lead to higher revenue from ‘ancillary’ products. Last week’s Shares ‘Griller’ feature (Shares 1 May), where we questioned Admiral’s finance director Kevin Chidwick on the company’s growth potential, highlighted the main issues of concern for the FTSE 250 company.
Margins at Confused.com, Admiral’s successful price comparison website, are under pressure due to increased competition. Premium rates for the UK car insurance industry are rising but lagging behind the increasing level of price competition brought about by price comparison websites.
Admiral believes it will be the winner in the end, being a highly profitable underwriter and thanks to Confused.com’s leading position, but last week’s changes in analyst sentiment shows shareholders should take those issues into account.
Nick Johnson of Numis says: ‘Profit growth will not slow at Admiral. They will still be able to grow at their rate of 10% per year. It is just that the high valuation for the business requires a higher rate of profit growth. The driver for a higher valuation for the company would be faster premium rates growth which is not
materialising.’
This should be offset by sales of ancillary products. Andrew Crean of Citigoup increased his forecasts for taxable profits in 2008, from £183 million to £194 million, factoring in a higher numbers of policies sold, which in turn drives higher ancillary sales. Numis expects a profit before tax of £192 million for the year.