Broker tips: Spire Healthcare, RSA, European equtities

The private hospital group said in a trading update that it continues to expect 2015 revenue growth in the range of £882m to £888m, and earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of around 18%.

Spire expects full year revenue for the 2016 financial year will rise by around 3% to 5% compared with 2015, assuming a revised tariff by NHS and health service regulator Monitor.

Monitor and NHS have proposed a 1.1% increase in the tariff for the 12 months beginning 1 April for all services paid for by national tariff, including those provided by the private sector.

“Whilst the proposed changes to the NHS tariff were more positive than we forecast (+1.5% versus our 4% decline) our sales estimates are broadly in line with guidance, suggesting a reweighting across the payor groups,” said Investec analyst Cora McCullum.

“We anticipate 3% upgrades to the full year 2016 estimate of EBITDA for both us and consensus, but we maintain our cautious view as we believe valuation fails to fully reflect the modest growth prospects.”

Nomura downgraded Direct Line to ‘neutral’ from ‘buy’ while retaining its 400p price target, switching its preference in UK non-life to RSA Insurance, which it raised to ‘buy’ from ‘neutral’ with an unchanged price target of 495p.

Nomura pointed out that DLG has been a star performer in the insurance sector over the past two years, with a total shareholder return of 40% last year, as it delivered on its strategy and faced fewer headwinds from Solvency II than its peers.

The bank stressed that it was downgrading after a strong performance, as the underlying investment case for DLG of strong total returns via special dividends is intact.

By contrast, RSA was flat in 2015 and while progress has been made on the balance sheet and underlying performance, low bond yields and FX went against the stock, serving to constrain performance.

“However, we believe from here there is scope to surprise to the upside on the balance sheet as the group discloses Solvency II numbers and a more up-to-date valuation on the pension position.”

Nomura is expecting RSA to start paying special dividends next year, which leads to similar yields for both stocks – 6.8% for RSA and 6.6% for DLG.

It reckons there is upside risk to both companies’ dividend estimates, so there isn’t much to choose between the two in terms of yields.

“However, we believe there is likely more potential for self-help measures at RSA, helping earnings and dividends, compared with DLG, which has achieved more on efficiencies and improving the underwriting performance.”

Societe Generale reiterated its positive stance on European equities for 2016 as it pointed out that fears over China are not new .

Between August and September of last year, the Eurostoxx 50 slid 18% before rebounding sharply, rising 16%.

SocGen said that once again, the market will probably force Chinese policymakers to ease more at a time when inflation and shadow banking are under control.

“Despite the recent drop in Chinese equities, our Asian equity strategist thinks that it is too early to neutralise SG’s negative stance,” said the bank .

It expects Eurozone equities to be supported by further earnings growth. In particular, it reckons the Eurostoxx 50 will be supported by a continued Eurozone recovery and a weak euro, and thus by better earnings momentum.

Consensus expectations are for earnings to grow by 7% this year.

The bank is ‘underweight’ Germany’s DAX, whose heavy weighting in industrials and autos makes it highly sensitive to Chinese news flow.

It expects the DAX to continue to underperform in 2016, exacerbated by the Chinese story, due to its high valuation and political headwinds.

SocGen prefers France’s CAC 40 and Italy’s FTSE MIB, where growth momentum is expected to continue to improve over the next two years.

In terms of sectors, the bank is ‘neutral’ autos and basic resources, both of which are expected to suffer in the short-term due to China woes.

To protect portfolios from current volatility, it recommends pharmaceuticals and tobacco, both at ‘overweight’, saying they are high-yield defensive sectors with low exposure to China.

Finally, to protect equity portfolios amid high volatility and fears over China, SocGen recommends going long European companies with low exposure to emerging markets and short those with high exposure.

Chinese stocks tanked this week, twice triggering the market’s now-suspended circuit breakers, dragging global markets down with them.