Broker tips: AJ Bell, Lancashire

AJ Bell's "decent growth" disappointed investors and the company's share price is in line with its growth potential, Berenberg said as it nudged up its share price target for the investment platform.

The company's shares fell after its second-quarter trading update because, though assets of £65.2bn were in line with Berenberg's expectations, the market was looking for stronger inflows, Berenberg said.

AJ Bell's first-half results, due on 27 May, should be "robust', Berenberg said. Performance was helped by high trading and commission during the Covid-19 lockdown and rising markets though Berenberg said commission growth would probably moderate.

The broker increased its estimate for AJ Bell's earnings per share by 8% and its share-price target to 420.0p from 400.0p while sticking to a 'hold' rating.

Organic growth is "robust" but may be slowing and with the UK lockdown due to end in June there could be a "negative shift" as customers spend less time on their investments, Berenberg said. The addition of about 34,000 customers in the second quarter, almost twice the level in the previous quarter, should provide support, it added.

"AJ Bell's shares traded down c6% post the trading statement, but still trade on c40x [earnings]," Berenberg analyst Jonathan Richards wrote in a note to investors. "We view the company's valuation as adequately reflecting the strong growth prospects, hence our 'hold' rating."

Bank of America has initiated coverage of London Market insurers, naming Lancashire its top pick with a 'buy' recommendation.

The bank said: "Out of our European insurance coverage, we believe London Market names offer the greatest gearing to the commercial (re)insurance pricing cycle. We estimate the sub-sector can deliver top-line growth of 13% CAGR over 2019-2023.

"We expect London Market combined operating ratios to improve 11 percentage points over this period, to 85%, supported by favouring pricing dynamics and improving operating leverage. We forecast earnings per share CAGR of 29% over 2019-2023, and we expected return on equity to reach 16% by 2023, which would be the highest since 2016. The compares favourably to reinsurance peers expected to deliver 12% by 2023."

It highlighted Lancashire as its top pick, with a target price of 880.0p per share, as it believes "now is the right time to buy into the hardening commercial (re)insurance pricing cycle through the stock".

BofA conceded that 2020 had been a "painful" period for the sector, but was optimistic the worst was now over.

"Despite suffering outsized losses from Covid in 2020, which also largely consumer the sub-sector’s 15-20% equity raises, we believe risks are finally fading,” it said. “We expect limited Covid impacts in 2021."