Broker tips: Royal Mail, M&S, UK insurers

4th Jan 2016 13:17

(ShareCast News) - Credit Suisse has cast doubt on rumours of a bid by Royal Mail for Dutch rival PostNL.In the run up to Christmas, there were newspaper reports that Royal Mail was preparing a €5 per share bid for PostNL, although this was denied by the Dutch company.Credit Suisse said it doubted a bid was likely due to three key factors, chiefly as the FTSE 100 company's core focus "needs to be on self-help"."RMG remains a multi-year restructuring story with top line challenges in mail and parcel, and we think manegement will be more likely to retain cash for restructuring than spending on significant M&A, which would also risk distracting attention from the task at hand," the Swiss bank said.Analysts at the bank also see limited synergy prospects from any merger, given limited mail or parcel network overlap beyond the circa-20% of access mail provided by PostNL's Whistl and cost bases of both companies dominated by large workforces.PostNL's core mail volume declines are predicted at 5-9% annually for 2015-2020, versus double digits over recent history."Further, PostNL's recent experience with the Dutch regulator - November's strategy update confirmed its expectation of a Eu30m-Eu50m hit from Significant Market Power measures - potentially increased labour difficulties under foreign ownership and the need to invest to at-best protect parcel margins provide further question marks."CS kept Royal Mail's rating at 'underperform' with a target price of 400p, below the latest closing price of 444p. Adverse weather led to another month of very soft comparables for retailer Marks&Spencer, but far more important for the company would be whether it could downsize its general merchandise store estate, Credit Suisse told clients .The Swiss broker was now forecasting like-for-like growth in sales of just 1% in food and zero in general merchandise.Several weeks of discounts of 30% or more across the store also meant second half gross margins would be 20 basis points lower.That led analysts Simon Irwin and Pradeep Pratti to cut their forecast for earnings per share by 2.5% which lowered their estimate for profits before tax to £682m."After 5 years of downgrades, we remain very cautious about M&S recovery prospects and our forecasts for the next year years remain circa 10% below consensus. We expect M&S to continue to lose market share in GM due to its margin-focussed strategy and platform changes, while competition continues to build," the analysts said in a summary of a research note sent to clients on 22 December.Hence, the analysts' recommendation was for the chain to be much more aggressive in churning its UK retail space, closing 5% of its stores and re-opening 3%.To fund such a move, they said M&S would need to cancel its annual £150m of buybacks.On the back of all of the above, the broker cut its 12-month target price on the company's shares from 500p to 475p."While the shares are very oversold at present (1m -13%) we believe they will continue to underperform retail peers in the year ahead." UBS has estimated net losses of £150m to £308m from storms Desmond, Eva and Frank at RSA Insurance, Direct Line and Aviva, equivalent to 3%, 2% and 1% of market caps respectively.The bank noted that KPMG has put the economic cost at £5bn and insured losses at £1.5bn from the first two of the three December storms."Given elevated water levels, we assume a further £1bn potential loss from the third storm (albeit this carries a high degree of uncertainty)," said UBS.It said all three insurers have reinsurance protection but at varying levels and with different 'hours clauses'.This refers to the period of time during which separate weather events are considered a single claim for the purposes of retention."The third storm is interesting as it hit beyond the hours clauses at RSA and Aviva, meaning that the retention layer will be incurred again," said the bank.UBS pointed out that after the December 2013 storms, which saw multiple weather events over a number of weeks, the average 'hours clause' on reinsurance contracts increased from 168 (7 days) to 504 hours (21 days).It noted that storm Desmond started on 6 December, with Eva on 25 December and Frank on the 30th, meaning the third storm began 24 days after the first one.UBS said that while Direct Line has a 30-day hours clause, RSA and Aviva both have the industry average of 21 days."Consequently, we expect these companies to incur double retention layers."