Admiral Group Plc H1 Financial Results Comment – 15 August 2014

The release of Admiral Group Plc’s first half financial results prompted a sharp drop in the shares as investor concerns grew that declining revenue would soon begin to eat into both profits and cash returns to shareholders. Despite the market reaction, Admiral’s H1 results did actually offer a glimmer of hope to those staying in for the long haul.

Against the backdrop of declining turnover, profit measures exhibited positive growth with an 8% increase in UK car insurance profit and a 1% statutory increase at the group level. This was while the group’s combined cost and loss ratio fell to 85.1%.

Notable improvements were also made in terms of customer numbers and retention, with the overall customer base growing by 9% during the period.

In addition to the better profit performance, management increased the interim dividend by 1% and also made further positive sounds relating to the trajectory of UK car insurance premiums, which have been a key driver of declining turnover throughout recent quarters.

Admiral Group Share Price Hourly Intervals



Balance Sheet, Dividend, Valuation and Takeaway

Given a sustained period of falling premiums, pressure upon margins and heightened combined operating ratios, we continue to believe that UK car insurance premiums are likely to be at an inflection point.

While Admiral are yet to see “firm evidence” of a changing trend in premium prices, the more positive tone leads us to believe that our viewpoint is echoed quietly across the management structure.

Looking past UK car insurance, Admiral continues to invest in its overseas operations, with the appointment of group finance director Geraint Jones as CEO of the US business being the most recent example.

Given the lack of innovation in US car insurance and Admiral’s leading position in price comparison retailing, the North American business represents an attractive opportunity for the group and the appointment of a time-served board member as CEO bodes well for the venture in our view.

From a valuation perspective, the group remains attractive relative to its peers, with a current earnings multiple of 12.6X 2013. This compares favourably with both Direct Line as well as Esure whose multiples and CORs (Combined Operating Ratio) are both less appetising when considering the merits of each underlying business.

In addition to an attractive valuation and earnings potential, H1 2014 saw Admiral continue its drive to improve shareholder returns with a 1% increase to the interim dividend this year (49.4 pence ^ from 48.9 pence).

Although we do not expect substantial dividend growth for the full year, projections of an increase matched with that of H1 (1%) are reasonable, which implies a yield of 7.1% (95.3 pence) at current prices.

All in all, our perspective on Admiral Group Plc remains in place and unchanged. With a solid history of driving improvements in revenue, profits, shareholder returns and overall value, we remain attracted to the group.

Consequently, we maintain our pre-existing target price of 1,620.00 pence. The next event of significance in the calendar is the interim management statement release on 07 November 2014. Accordingly, we shall endeavour to update our view and price target at this time.


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