Citigroup cuts Admiral to 'sell'; says stock is fully valued

25th Jun 2015 08:37

Citigroup downgraded Admiral to 'sell' from 'neutral' and cut the price target to 1,335p from 1,354p, saying it's a high-quality name, but fully valued."Admiral is undoubtedly a high-quality business and has been the benchmark for the UK motor sector for several years. As a result, Admiral consistently trades at a premium to peers," said the bank.However, it said it sees limited room for price-to-earnings expansion, given the growth profile is unlikely to return to historical levels, even assuming an upswing in UK motor rates.Citi forecasts a 0% compound annual growth rate in Admiral's earnings over 2014-2017. "The UK home market is still in its infancy and the international businesses are yet to make a profit and need ongoing investment. So, in aggregate, we see less potential for upside surprise in Admiral's results compared with peers."Citigroup said that Admiral's premium valuation is currently supported by its historically strong dividend yield of around 8%, which has been driven by a 95% payout ratio. However, based on its forecasts for net income, Citi said it will be increasingly difficult for the yield to be maintained at this level.The bank added that it sees scope for more upside at peers, such as Esure and Direct Line, which should be able to generate better earnings growth.At 08:45, Admiral shares were down 2.5% at 1,395p.