Berenberg upgrades Direct Line to 'buy'

Analysts at Berenberg upgraded insurance provider Direct Line from 'hold' to 'buy' on Friday, stating the stock was now "too cheap to ignore".

Berenberg said Direct Line traded down by 12% on Thursday following rival Sabre's first-half profit warning, and while it recognises inflationary pressures in the market, it expects that DL will be able to manage these risks well.

In addition to this, the German bank, which stood by its 277.0p target price on the stock, believes the underperformance of Sabre was partly driven by company-specific issues.

"As such, we think Direct Line is now too cheap to ignore, trading on 7x 2023E EPS and a 2023E dividend yield of 13.4%. While there is risk to 2022E earnings, we expect motor insurance pricing to accelerate over the remainder of 2022, which will support earnings in outer years," said the analysts.

"Despite some of our concerns heading into the results, we believe the opportunity is now clear. Direct Line remains a well-run business with all of the capabilities to perform in the UK personal lines markets. Moreover, should weaker companies in the market face financial difficulties in 2022, this will likely reduce competition in the market and we would expect the larger, more dominant companies, such as Direct Line and Admiral, to capitalise."

Reporting by Iain Gilbert at Sharecast.com