Merrill Lynch issues buy recommendation on Resolution after 10% share price this year
Resolution, the company set up to buy underperforming life insurers, has fallen 10% so far this year on worries about its structure, its outlook and its strategy.
In comparison the insurance sector is up by nearly 30% over the same period, but analysts at Bank of America Merrill Lynch believe it could be time to buy Resolution's shares.
In August the company called a halt to takeovers in favour of boosting returns to shareholders from its existing businesses, and raised its dividend by 5%. That could just be the start, said Merrill, which moved its recommendation from neutral to buy and raised its target price from 234p to 264:
We now have greater confidence in the company's ability to meet our dividend forecasts. And this is the most obvious reason to own the shares, in our view. We think the £300m or so annual dividend cost is comfortably (1.2-1.3 times) covered by free cash flow, especially taking into account the likely £60m annual cash saving we expect from debt restructuring. Moreover, Resolution's balance sheet is defensively invested and is not overly leveraged (17% gearing). And the company's capital position looks adequate with more than £3bn economic capital surplus. All of the above suggest limited risk to the dividend outlook, which is far from being priced into the shares, in our opinion.
That backing helped lift Resolution 15.4p higher to 236.6p, making it the biggest riser in the leading index.
Still with insurers, Legal and General was lifted 3.9p to 144.2p by vague talk of a possible bid. Traders suggested Germany's Allianz as one potential predator, with a price of around 250p a share mentioned.
Overall the FTSE 100 finished 45.84 points better at 5884.90 ahead of the US elections and a Greek vote on its budget and austerity package, due on Wednesday and Sunday. The index has hit a new two week high, thanks to a number of positive corporate updates and despite some poor UK industrial production figures and downbeat eurozone data.
Among the companies reporting, G4S - in trouble recently thanks to the fiasco over its London Olympics contracts - climbed 9.2p to 270p following news of a pick up in business in the third quarter. It saw strong growth in emerging markets and hopes to win further UK contracts despite the Olympics problems.
Marks & Spencer rose 10.8p to 398.7p after its profits came in better than forecast, down 3% in the first half following a recovery in the second quarter.
Chip designers Arm and Imagination Technologies were lifted by news they were carving up technology group MIPS Technologies.
Arm, which added 14.5p to 709.5p, is part of a consortium buying the rights to MIPS' portfolio of 580 patents, contributing $167.5m to the total $350m purchase price, partly to reduce any future litigation risk.
Separately Imagination, up 9.3p to 474.3p, is buying MIPS' operating assets, effectively its 160 engineers as well as 82 patents, for $60m. The move is designed to help Imagination become a stronger competitor for Arm.
InterContinental Hotels gained 21p to £15.45 after better than expected third quarter profits of $167m, up 9%. Talks to sell its Barclay hotel in New York continue but it is also seeking new potential buyers of the property.
Heading in the other direction was Babcock International, down 34.5p at 954.5p on profit taking after a positive update. Half year profits rose 13%, with the company benefiting from austerity as governments outsourced business to cut costs.
Standard Chartered fell 14.5p to 1468.5p as Credit Suisse cut its recommendation from neutral to underperform.
Associated British Foods dipped 1p to £13.65 as it sounded a note of caution on the outlook for its sugar business, despite reporting a 17% rise in full year profits to £974m, boosted by another strong performance from its Primark discount fashion chain.
Invensys closed 4.5p higher at 238.9p as analysts at Nomura said the company was likely to boost its dividend payout and could even consider a cash return to investors. The bank began coverage of the rail equipment and controls group with a buy rating and a target price of 330p, both on the outlook for its business and the prospect of it becoming cash rich.
But Premier Oil fell 7.5p to 352.6p after the Spaniards East well in the North Sea- where it owns 28% - was plugged and abandoned as a dry hole. Other companies with stakes in the well include Parkmead, down 1.13p to 14.5p, Serica Energy, 1.25p lower at 28.625p, and Faroe Petroleum, which fell 1.25p to 146.5p.
Finally Armscote Investment Company, a business quoted on ISDX (the former Plus market), was steady at 1.25p as it announced the acquisition of Venn Life Sciences, the raising of £2.5m and a plan to move the resulting business to Aim on 26 November.
Separately, Armscote directors Adam Reynolds and Paul Foulger are part of a consortium paying £4m to Autoclenz, the car valeting company, for its trading business.
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