Broker snap: Admiral overvalued despite a stable Q3

3rd Nov 2010 11:55

Despite a positive third quarter statement, finnCap sees Admiral's stock as overvalued and recommends a 'sell' for the car insurer.Vehicle count has grown by 28% in the UK with rates going up in double digits "but competition remains in the aggregator market, which is Admiral's life blood", said analyst Charles Coyne.Claims trends have remained stable since the first half - "this is a vital piece of news, because the fallout from the Equity Red Star/Cox $360m reserve strengthening has been limited elsewhere", Coyne said.Ancillary income is also stable at over £74 per policy giving the group a "strategic competitive advantage".Admiral only contributes 27.5% of the capital needed to write business, the rest comes from reinsurance companies such as Munich Re, Hannover Re, New Re, Swiss Re and, from 2011, Mapfre Re and XL Re.The broker highlights this as "an excellent business plan that has stood the test of time", as Admiral collects profit commission and uses other people's capital.However, "despite returns on equity of circa 80% this year and next, the shares appear overvalued", Coyne said."Admiral trades on 19 times net assets, a price earnings ratio of 25 times and a yield of 3.9%". The target price of 1,250p-1,300p "looks more appropriate".The broker stays with the lower range of this forecast with a target price of 1,250p and confirms a 'sell', despite strong fundamentals and excellent relational contracts with key reinsurers.