Berenberg lowers price target on Direct Line

(Sharecast News) - Analysts at Berenberg slightly lowered their target price on insurance firm Direct Line from 344p to 331p on Thursday, noting the group's transformation efforts were not without risk yet needed, in the medium-term, to offset the multiple headwinds that were looming ever closer on the horizon.
Berenberg said Direct Line's interim results painted a picture of solidity despite the backdrop of challenging market conditions, with the company remaining on track to meet its financial targets in the short-term.

However, the German bank noted that over the medium-term, reaching its targets would depend on the group's ongoing transformation efforts.

Direct Line now admits that it has been at a disadvantage in the price comparison channel, making it difficult to compete for profitability, something that was regularly denied by previous management. To correct those deficiencies, Direct Line began investing significantly in order to transform "virtually every IT platform" in its business, something Berenberg agreed was necessary.

However, Berenberg noted the process was "not free" and did not come without "significant execution risk", with a failure to execute successfully potentially making growth in its core businesses even harder to achieve.

"We project material earnings headwinds. These include lower reserve releases, higher attritional loss ratios, increasing amortisation charges and lower investment returns. To offset these headwinds, DLG will have to deliver on its change programme to produce a more-efficient business capable of competing profitability on price comparison websites," Berenberg added.

While Berenberg supported Direct Line's change initiatives, it kept its 'hold' recommendation despite recent share price weakness.