Morgan Stanley downgrades Beazley, cites limited upside

Morgan Stanley downgraded its stance on insurer Beazley to ‘equalweight’ from ‘overweight’ and cut the price target to 350p from 550p as it said the company’s limited financial flexibility will leave the cost of equity at elevated levels and limit the upside.

MS said that despite the capital raise in the first half of the year, Beazley's growth prospects are constrained by limited capital and financial flexibility.

"Our detailed analysis suggests that the company could see challenges in delivering the levels of growth that we envisaged in our previous forecasts," it said. The bank cuts its 2022 net income estimate to $369m from $393m and versus consensus of $352m for a return on equity of 17.5%, down from a previous estimate of 16.8% and compared to consensus of 16%.

MS said it expects Beazley to fully utilise the remaining $225m letter of credit to meet its reduced growth assumptions and at the same time, pay a flat dividend in 2021 and 2022.

"We remain cautious as Beazley's limited financial flexibility offers modest loss absorption capacity and exposes our base case to greater risk," it said. “As a result, we expect the cost of equity to remain high and therefore increase our cost of equity assumption to 12% (previously 9.5%)."

However, the bank said its bull case shows that, hypothetically, a second capital raise could support higher growth and capital returns.

"We model a $400m rights issue (circa 20% of today's market cap) and a $150m debt issuance enabled by the increase in equity capital in 2021.

"In such a scenario, we think Beazley could a) deliver net earned premium growth of 13%/12.5%/11.5% in 2020/21/22and b) resume the payment of a progressive dividend."

At 1310 GMT, the shares were down 3.2% at 316.40p.