RSA attracts buying interest

RSA Group's share price plunged by almost a quarter when Zurich Financial pulled the plug on its potential bid for the UK insurer. Now, six weeks later, it's issued a reassuring third-quarter update and played down the "distraction" from the Swiss firm's volte face.

"We are very pleased with progress to date in RSA's turnaround. If we can keep the improvements coming, the future is bright for RSA as a high quality, high performing leader in its markets," reckons chief executive and former Royal Bank of Scotland head honcho Stephen Hester.

"Our Plans are based on three pillars of work, each going well. The strategic refocus is nearing completion with the sale of our Latin America businesses announced in September, the last major element. Our balance sheet and capital work is also approaching satisfactory outcomes. And our complete operational overhaul of the business is showing good results and gathering still further momentum."

That all sounds great, but remember, RSA had a huge task on its hands following a series of profits warnings driven by weather-related losses and material reserve additions. A £773 million rights issue helped strengthen its capital position, but this turnaround still has much further to run.

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And Hester warns us that insurance markets remain challenging and financial markets volatile.

However, net written premiums for the nine months of £5.1 billion was better than forecast, with Scandinavia offsetting weakness in Canada. Third-quarter trends are "well above" 2014 and improving on those reported for the first half. Cost and attritional loss ratios are getting better, too, and the balance of volatile underwriting items has been "favourable versus plan".

Despite progress so far, the team at Bank of America Merrill Lynch (BoAML) think RSA's restructuring is in its infancy and expect the company to extend its cost saving ambitions at the full-year results in February.

After a 12p increase during the period to 294p, RSA shares now trade on 1.4 times tangible net asset value (TNAV), a PE of 12.8 times for a 12% return on tangible equity. There's also a dividend yield of 2.8%.

"These metrics may not necessarily screen as inexpensive but this is common for a restructuring story, in our view. And management’s comments suggest that some positive momentum is building in the business," writes BoAML, which thinks the shares are worth more like 480p.

"We believe that the stock should trade in the region of 1.6x TNAV for the level of return. The restructuring remains in its infancy and the company can materially increase its earnings, TNAV and dividends in the coming years, in our view. Buy."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.