As markets eagerly await the European Central Bank and details of its expected bond buying programme, closer to home insurance companies were in the spotlight.
RSA Insurance has risen 12.5p to 464.3p after Credit Suisse issued a positive note on the sector. The bank said:
The fundamental appeal of the UK life and savings companies is underpinned by low interest rate risk, solid growth dynamics and attractive dividend profiles. While politics (elections) and regulatory developments may provide some distractions in the coming months, the compounding growth in profits, cash and dividend per share justify continued investor support, in our view.
In the the property and casualty sector, we upgrade RSA to outperform (from neutral) as we believe delivery on cost and operating return targets will provide capacity for a sharp improvement in capital return.
Elsewhere Royal Mail is leading the FTSE 100 risers, up 17.5p or 4% to 448p, after it said nine month revenues rose 1%, with record parcel volumes in the build-up to Christmas, helped by the demise of of rival City Link.
Parcle volumes rose 3% in the period with flat revenues, but letter volumes fell 3% with flat revenues . But its European parcels business did better, with revenues up 8%, and it said full year results would be in line with expectations.
In November the business warned its parcels business would be hit by growing competition, with Amazon delivering more of its own packages and other companies increasing capacity.
Gert Zonneveld at Panmure Gordon said:
The company continues to face some significant challenges. The pricing environment in the UK parcel market remains challenging (competitor City Link went into administration late December) while direct delivery concerns remain with OfCom action unlikely to take action in the near term.
The strength of the balance sheet remains a plus point, which should sustain an attractive dividend yield well in excess of 4%.
A return of capital is also a possibility, largely dependent on the size and timing of any property disposals, although this is unlikely to happen until there is greater regulatory visibility re direct competition. We maintain our target price of 440p and retain our hold recommendation.
But Robin Byde at Cantor Fitzgerald kept his sell recommendation:
Trading trends are about in-line with the first half, with parcels improving and letters slightly weaker. Despite the recent failure of City Link, we think that the competitive headwinds in UK parcels will stiffen in 2015 as rivals add more capacity. We are also concerned about employee costs (in the UK and Germany) which are forecast to continue to increase with on-going pay rises and only partially offset by productivity improvements. Royal Mail will continue to benefit from one-off gains, such as from the sale of the Paddington Mail Centre. This was sold in October 2014 and we forecast net cash proceeds of £108m (gross: £111m), with a book profit assumed of around £106m to be booked in the second half.
Royal Mail has underperformed the FTSE 100 by 7% in the past 3 months and it has an attractive dividend yield (4.5% versus FTSE 100 offering 4.2%). However, its valuation is unattractive, in our view. The stock is trading on a 2015e PE of 14 times versus other European postal operators on 12 times (a 17% premium). We maintain our sell recommendation.
Overall the FTSE 100 is currently up 4.64 points at 6732.68 ahead of the ECB announcement. Rebecca O’Keeffe at Interactive Investor said:
Expectations are now at fever pitch that [ECB President] Mario Draghi will introduce a mammoth round of quantitative easing today to weaken the euro and head off deflation in the region. With a growing share of the eurozone government bond market already slipping into negative yield, the anticipation is that QE will have a more direct effect upon other asset markets such as equities or property.
However, in addition to the key question of how much, the market will also need to look closely at how this stimulus will be implemented and structured. The danger is that with the weight of expectation so high, today’s details may disappoint.
Elsewhere SSE is down 28p to £14.76 as its shares went ex-dividend, while Compass is 17p lower at £11.08 for the same reason.
