Jefferies upgrades Admiral to “buy” after 45% sector de-rating

Investing.com -- Jefferies upgraded Admiral (LON:ADML) (ADM), the UK-based motor and general insurer, to a “buy” from a “hold” rating, highlighting what it calls a “compelling entry point” following a prolonged de-rating relative to the sector. 

The brokerage set a price target of £4,100, implying a 29% upside from current levels, alongside a 7% dividend yield.

ADM shares have gained 25% year-to-date, outperforming the SXIP index’s 16% rise. However, Jefferies noted the stock’s price-to-earnings ratio has remained broadly unchanged, masking a broader multiple contraction. 

Over the past two years, ADM’s P/E has fallen 26% in absolute terms and 45% relative to the SXIP, leaving the current P/E premium near historic lows of 14x versus 11.4x. 

The brokerage attributed this de-rating to weak market sentiment in UK motor insurance following a cyclical pricing peak in December 2023 and regulatory scrutiny over premium finance.

“Market sentiment has never been further detached from ADM’s fundamentals,” Jefferies said.

The brokerage cited ADM’s record profitability and strong earnings trajectory as reasons for the upgrade. Fiscal 2024 marked the insurer’s most profitable year ever, driven by a 15% increase in UK motor policy count and improved operating leverage. 

Jefferies said ADM has “systematically outgrown peers while operating at better underwriting margins by ~20%pts vs the industry.” 

Additional support comes from a maxed-out reserve buffer, delayed reinsurance profit commissions, and improving operations across Home, European, and Money segments. 

Jefferies forecasts an 8% compound annual growth rate in EPS over FY25-27, with estimates 6-12% ahead of consensus.

Regulatory risk appears less acute than the market assumes. The FCA is expected to finalize its premium finance investigation by year-end but has ruled out banning the practice or imposing interest caps.

Jefferies highlighted that ancillary income beyond premium finance accounts for just under 30% of group earnings, suggesting the market is overly punitive.

“On the pricing front, our latest tracker showed an acceleration in Aug. Further pricing pick-up and removal of a regulatory overhang into yearend should bode well for sentiment,” the report said.

Jefferies also pointed to incremental earnings drivers, including potential reserve releases, reinsurance profit commissions from prior underwriting years, and growth in non-UK motor divisions. 

The brokerage raised EPS estimates by 34%, 26%, and 18% for FY25e, FY26e, and FY27e, citing better UK motor combined ratios of roughly 8 percentage points. 

“We find ADM’s risk/reward attractive, prompting our upgrade to Buy,” Jefferies said, noting that the stock’s P/E multiple of 14x is historically low.

The brokerage set a base-case price target of £4,100, an upside scenario of £4,700, and a downside of £2,700. 

Key catalysts include monthly and quarterly data from the UK Office of National Statistics and the Association of British Insurers, premium inflation trends, and the FCA’s pending report on premium finance.

Jefferies added that regulatory risks in Home and Travel insurance, which make up 6% of group earnings, appear already reflected in the stock’s valuation.