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Admiral Group Plc; Trading Update – 17 July 2014

 

Admiral announced another solid performance in terms of customer acquisition and new vehicle numbers last week when it released its trading update for the six months ending June 2014. Here the UK customer base underwent an increase of 4%, while overall customers at the group level grew by 9%.  

However, as a result of reductions made to premium rates in late 2013, the improvement in customer numbers is yet to be felt on the top and bottom line. Consequently, sales revenue fell across all divisions over the period, leading the shares to close nearly 5%  lower on the day.

In addition, Admiral announced that it would tap capital markets for the first time in order to meet its 2016 requirements under the Solvency II Directive, without detracting from the group’s ability to meet its commitment to shareholders in terms of dividends.

This has unnerved some investors and led to increased scrutiny of Admiral’s finances. While the introduction of leverage to the group’s balance sheet does go some way towards increasing its risk profile, we believe that the rationale for this is sound.

Admiral has for a long time paid a generous dividend, which is one of the key attractions of the shares. To interrupt this now would be damaging to existing shareholders, at a time when investor sentiment toward motor insurers is lukewarm at best.

With rates (borrowing) still low and fixed income investors hungry for yield, now appears as an ideal time as any for Admiral to enter the capital markets.

While the initial response to the group’s trading update clearly denoted some level of displeasure among investors, there are grounds to believe that this is could prove to be short-lived.

Our view is that both the shares as well as the underlying business are approaching an inflection point. With management cautiously alluding to the possibility that motor insurance premium rates may be bottoming, and given that the group has continued to post strong performances in terms of new customer acquisition, the future earnings outlook at Admiral still appears positive.  

In short, Admiral Group remains an attractive growth story for us. With a history of strong earnings and dividend growth, as well as attractive expansion prospects in the group’s international businesses, we continue to believe that the future is bright for both the shares as well as shareholders. As a result, we maintain our pre-existing price target at 1,620.00 pence per share.

The next major event for ADM.L is the release of H1 financial results on 13 August 2014. Accordingly, we shall review both the results as well as our price target for the shares at this time.

Admiral Group Plc Share Price Hourly Intervals

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