Aviva fits well into mid-cycle portfolio
AVIVA - We have recently upgraded our recommendation on Aviva to outperform and raised our fair value to 550p. Aviva shares have underperformed the FTSE Life Insurance sector over the past 12 months, largely on fears over its capital position and UK focus.
As markets recover, and capital concerns abate, we think that the deep value offered by the shares can be realised. Aviva is a composite insurer, and as such is well diversified both by geography and business line.
Although the growth outlook for its key regions – UK and Europe – remains muted, we think this is factored into the share price and the group has growing divisions both in the US and Asia.
There is a risk that the underwriting cycle in general insurance is turning negative in the UK, but motor rates are on the rise and the division provides a defensive earnings stream should conditions deteriorate.
Finally, the company profile fits well with our strategic theme of shifting into mid-cycle companies, which have lagged the recent rally. The valuation is undemanding and, following the cut to the dividend, we think there is potential for increases.
Halfords – We are retaining our outperform recommendation on Halfords and raising our fair value to 540p following the acquisition of Autocentres (market leader in MoT service and repair). We continue to believe that Halfords’ core business offers reliable earnings growth. Cycling is a trend that is set to continue to increase and with the average age and the total size of the UK’s car population set to increase, Halfords looks to be in a good position. On top of all this, the acquisition of Autocentres has the potential to enhance earnings significantly over a much longer period than currently assumed by consensus estimates. The shares still look excellent value to us on just over 11 times 2011 forecast earnings, with a 5% dividend yield.
Scottish & Southern Energy – We believe SSE’s very strong operational track record, sensible management and attractive yield remain the group’s key strengths. The group is half-way through its £6.7bn capital expenditure programme, and is making good progress on new gas plants and wind farms. Longer-term, SSE is expected to participate in the UK nuclear new-builds programme, via its JV with GDF Suez and Iberdrola. As new investment starts delivering returns, we expect investors to refocus on SSE’s solid growth prospects in generation, development of its network assets, and the continued discipline and customer retention in supply. Although we recognise there may not be strong catalysts for the shares in the short-term, the shares are trading at a discount to the sector and the very attractive 6.2% yield is low risk in our view.
Andrew Miller is regional office head of Barclays Wealth in Newcastle