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Investing.com -- Barclays (LON:BARC) has upgraded Aviva (LON:AV) to an 'overweight' from ‘equal weight’ rating, citing the insurer’s proposed acquisition of Direct Line (LON:DLGD) Group (DLG) as a key driver of future growth.
In a note dated Friday, analysts at Barclays flagged the benefits of the deal, which is expected to generate long-term synergies and earnings growth.
The analysts believe Aviva's management has been conservative in its projections for the acquisition's financial impact.
While Aviva has estimated an earnings per share (EPS) accretion of around 10% by 2029, Barclays forecasts a higher increase of approximately 13%.
The brokerage also raised its price target for Aviva’s stock by 5%, moving it from 540 pence to 565 pence, indicating a potential upside of 12%.
Barclays' assessment underscores the operational efficiencies that Aviva is expected to achieve by integrating Direct Line’s business into its own.
Analysts estimate that Aviva can realize cost synergies amounting to 30% of Direct Line’s addressable cost base, equivalent to roughly £196 million, compared to Aviva’s more cautious projection of £125 million.
While the restructuring and integration costs could be higher than Aviva’s estimates, Barclays anticipates the deal will be accretive to earnings from the first year onward.
The brplerahe also addressed concerns regarding Aviva’s capital position, noting that while the transaction will temporarily raise the insurer’s Solvency II leverage ratio to around 30.4%, this is not expected to pose a long-term issue for equity investors.
Barclays projects that Aviva’s Solvency II ratio will initially decline but recover beyond management’s target range of 160-180% from 2025 onwards, allowing the company to reinstate share buybacks of £300 million annually from 2026.
The note reflects a broader confidence in Aviva’s direction, particularly its efforts to consolidate its position in the UK insurance market.
The proposed acquisition, still awaiting regulatory approval and shareholder votes in March, is seen as a move that will enhance Aviva’s scale and competitive edge in the sector.
Aviva’s stock was last trading at 503 pence, with Barclays' revised target price suggesting an all-in return of approximately 19%, including dividends.