Broker tips: Admiral, BAE Systems, Hipgnosis

Insurer Admiral tanked on Tuesday after Citi downgraded its stance on the shares to ‘sell’, saying that a ‘deep dive’ into industry loss ratio trends had suggested that consensus estimates for the group are currently an outlier.

"We downgrade Admiral to sell and issue a negative catalyst watch as we expect an earnings expectation reset and material downside risk into 1H23E numbers," Citi said.

The bank said it’s 10% below both 1H23 and FY23 consensus earnings per share estimates.

Elsewhere, Morgan Stanley initiated coverage of BAE Systems with an ‘overweight’ rating and 1,208p price target, as it initiated coverage on the European defence sector.

The bank said BAE is its ‘top pick’ among the defence names.

"We believe the group is in the early phase of a multi-year upturn, driven by strong and consistent programme execution, rising global defence spending, and diverse positions on key growth programmes," it said.

"Our longer-term (2025-30) earnings forecasts are materially above consensus (6% CAGR versus 3% for consensus)."

MS said its conviction is driven by its bottom-up programme forecasts, which it thinks may be too conservative still.

"We do not believe the growth outlook is accurately reflected in the current valuation, with the shares trading in-line with their recent (1year) average and at a 10% discount to US peers.

"We think the shares deserve a higher rating. At our price target, the shares would trade on a P/E of 16x in 2025, in-line with US Defence Prime peers, which we think is justified given the group's diversified portfolio and long-term growth and shareholder returns outlook."

Morgan Stanley said it expects consistent execution and order activity to drive consensus expectations higher.

“The group has an attractive shareholder returns policy, with a dividend yielding 3% and an ongoing share buyback programme, which we think could be extended,” it said.

The bank initiated coverage on the broader European aerospace and defence sector with an “attractive” view, as it said that with valuations near historical highs, earnings upgrades are key for further upside to European defence shares.

"We're defensive, preferring stocks with diversified exposures and where current expectations are not elevated," it said.

Jefferies upgraded Hipgnosis Songs Fund to ‘buy’, after the risk-reward dynamic for the music investment firm became “more favourable”.

Jefferies - which previously had a ‘hold’ rating on the stock - said it saw potential for Hipgnosis to announce selective disposals, generating cash to repay debt and/or make share buybacks.

It continued: "To date, Hipgnosis has yet to make a single disposal. Relationships with the selling songwriters are clearly key, with the manager entrusted with the assets, rather than being a pure financial buyer.

"That said, the fund could still dispose of an institutional acquisition, like Kobalt Fund 1, consisting of 33,000 songs, acquired for $23m in 2020.

"Alternatively, [it] could potentially sell a minority strip of its entire portfolio, while maintaining control of its catalogues."

Jefferies concluded: "We see Hipgnosis’s risk-reward dynamic as having become more favourable ahead of forthcoming results and subsequent continuation vote.

"Hipgnosis could attempt to appease shareholders by announcing plans to make portfolio disposals, providing a catalyst to help narrow its current deep 46% discount to net asset value. As such, we upgrade to ‘buy’."

The firm is due to report final results on 31 July, following by an annual general meeting in the autumn, when its first continuation vote will be proposed.