JP Morgan starts coverage on Aviva at overweight

13th Apr 2015 12:41

The combined Aviva and Friends Life Group (FLG) stands to benefit from higher cash-flows, a reduced risk profile and better growth prospects, according to analysts at JP Morgan Cazenove.In total, management now expects free cash flows of £1.4bn. That will help it raise its dividend by 10%/15%/20% over the next three years, the broker wrote in a research note sent to clients after its restriction period was lifted.Aviva will now offer a free cash flow yield of 5.6% in comparison to the estimated UK life insurer average of 4.4% for 2016.The acquisition of Friends Life will decrease the insurer's debt leverage on a tangible net asset value basis to just 36% by 2015, the broker estimated. Hence, no additional deleveraging will be needed."From a Solvency perspective, we believe the risk of the combined group will reduce as compared to Aviva standalone as FLG has low risk profile businesses (i.e. unit linked) whereas Aviva has high risk profile operations such as spread and non-life businesses," analysts Ashik Musaddi and Kunal Zaveri write to clients.The tie-up will also solve the prior lack of scale in the pensions business, which meant Aviva and Friends Group were not cost efficient, improving their growth prospects. The outlook for asset management revenues has also improved thanks to scale and inflows from FLG's life business.Mussadi and Zaveri have started coverage on Aviva with an 'overweight' recommendation and 622p target price.