Deutsche Bank ups Direct Line to 'buy' on attractive valuation, receding risks

Deutsche Bank upgraded Direct Line to 'buy' from 'hold' on Tuesday and lifted the price target to 390p from 380p as it pointed to an attractive valuation, an expected inflection in motor pricing, medium-term optionality and receding risks.

As far as the valuation is concerned, DB said there is no doubt Direct Line provides an attractive dividend yield for the next few years. It's around 8.8% a year on average over the next three years, with long-term growth prospects of 2-3% leading to an 11% total shareholder return.

In addition, the bank said lower motor insurance prices since September 2017 are now adequately reflected in both consensus expectations and the current share price.

Deutsche also said that following the company's analyst day in Bristol last week, it is clear there is "significant" potential to improve productivity from the new IT platform.

It noted that Direct Line is rolling out an alternative pricing model, increasing its quote footprint and integrating Guidewire and Radarlive in its pricing, which in turn should allow it to gain share in the PWC channel over time.

"Though it could be at least 18-24 months before we start to see a tangible benefit of these investments coming through the P&L, these initiatives could nevertheless provide additional upside if delivered successfully on top of an already very attractive valuation," DB said.

DB added that having spoken to the company, it remains comfortable that a recent surge in subsidence claims seen elsewhere in the industry should be manageable for Direct Line.

At 0910 BST, the share were up 1.3% to 327.20p.