“The stock is trading at a small discount to the sector, which we view as harsh given its now strong balance sheet and in line debt leverage. We find ourselves above consensus and… expect the group to be at the upper end of its medium-term targets,”
Bank of America Merrill Lynch analyst William Hardcastle hails Stephen Hester's turnaround at RSA.
There was little reason for optimism in RSA Insurance (LSE: RSA.L - news) 's first set of results following a major restructuring, says Questor RSA Insurance 430½p-13.4p Questor says SELL RSA Insurance’s [LON:RSA] first set of results, following some major balance sheet surgery under Stephen Hester, was an opportunity to show shareholders the promise of a brighter future. However, the insurer fluffed its lines and Questor is now bailing out.
RSA Insurance’s first set of results, following some major balance sheet surgery under Stephen Hester, was an opportunity to show shareholders the promise of a brighter future. RSA, formerly known as Royal and Sun Alliance, first hit problems in November last year.
A black hole was discovered in the Irish division’s accounts, which required a near-doubling of reserves from £70 million to £130 million.
The gap in the Irish arm’s insurance loss reserves was compounded by a £220 million fraud. RSA launched a £748 million discounted rights issue in March, the Baltic and Polish divisions were sold in April to raise a further £300 million, and the share price was consolidated five-for-one in May.
This offset a strong performance in Scandinavia. Looking at the company as a whole, the amount of insurance it is writing is falling, with net written premiums down 9% to £3.9 billion. And the core insurance business is only just breaking even, with a profit from underwriting of £2 million, down from £188 million in the same period last year.
The problem for RSA is that with record low bond yields, investment returns are also falling, down from £192 million to £166 million. Once you add in head office, interest and restructuring costs, the company reported first-half, pretax profits of £69 million, down from £250 million at the same stage last year.
Questor picked RSA as a very high risk buy last year (92½p, December 16) on the basis that the core business would attract buyers and it would resolve its problems. Questor thinks this is as good a time as any to bail out of this speculative tip, and downgrades to a sell.
Markets jittery at the moment but Hester is doing all the right things and this one will turn around but not soon. Hang in there and once the divi is restored and Balance Sheet clean and strong we will see it come back
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