Broker tips: Sabre Insurance, Close Brothers, Elementis

The motor insurance underwriter on Tuesday reported that gross written premiums totalled £225.1m in 2023, up from £171.3m the year before, while the net loss ratio fell sharply to 56.3% from 66% – in line with the firm's historical target level in the low-to-mid 50% range. As a result, pre-tax profit swelled to £23.6m from £14m in 2022.

RBC said it was increasing its estimates by around 7% on average, driven by stronger-than-expected growth and better loss ratios, saying that "growth momentum might drive further upside from here".

"The hard market in UK motor insurance may persist for a bit longer as claims inflation has not let up. This should allow SBRE to continue capitalising on this opportunity by winning volumes while underwriting at target profitability," the broker said.

"Consumer Duty remains a wildcard for now but SBRE's low reliance on ancillary income at <10% of operating earnings should provide some insulation."

Shares in Close Brothers continued to surge on Wednesday after the merchant bank's first-half results in which the company eased investors' concerns about an upcoming regulatory probe, with Berenberg providing an extra boost after lifting its target price for the stock.

The stock rallied after the company announced a raft of measures – including the suspension of dividends – to strengthen its capital position by £400m as it prepares for the conclusion of a Financial Conduct Authority investigation into motor finance, which centres around so-called discretionary commission arrangements. Through DCAs, lenders allowed motor dealers to use their discretion to land on interest rates within a certain range, leading to claims that consumers had been over-charged for car loans between 2007 and 2021.

Berenberg said that actions, which could provide around 390 basis points of capital support, "help to alleviate risks to the bank’s potential large and uncertain motor finance redress costs".

The broker added: "While uncertainty remains high, with the bank’s share price still down c55% ytd, growth in Close Brothers’ core businesses is also reassuringly resilient."

Berenberg upped its target price from 425p to 470p, saying it now values the bank at 0.4 times tangible book value, up from 0.3 times currently.

"We maintain our 'buy' rating, but acknowledge risks may be too great to bear for many investors."

HSBC upgraded Elementis to ‘buy’ on Wednesday and lifted the price target to 170p from 150p as it said it was impressed by the company’s portfolio quality and management execution "amid a challenging macro and weak end markets".

The bank said any recovery could flip to both growth and margins for Elementis.

"We think Elementis’ portfolio has evolved into strong franchises with niche but leading positions with high margins and growth prospects," HSBC said. "Elementis also has long duration and differentiated resources in the form of the only hectorite clay mine in the world in California and talc deposits in Finland."

HSBC said the personal care business has strong cost advantages in the anti-perspirant actives, derives around 80% of raw materials from natural or naturally-sourced raw materials, and its foray in the skin and sun care markets is also bearing fruit.

"While its hectorite clay and talc-based applications in personal care and coatings will remain important, Elementis’ new product launches, increasingly specialty focus and timely divestments have yielded fruit - gross profit margins reached historic highs of 45.8% in 2023," it said.

The bank noted that group adjusted EBIT margins were 14.6% in 2023 and it targets margins to improve to 19% over the medium term, aided by improving its product mix, reducing costs and a normalisation of demand trends.

"We think margins could continue to rise from here (we expect circa 17% in 2027) and upside risks exist if demand conditions support and management execution remains strong."