JPMorgan upgrades 'more balanced' Just Group

JPMorgan centred its previous 'underweight' thesis on four key factors - Just Group's limited balance sheet flexibility to absorb macro stresses, its higher debt leverage following the firm's recent issuance of debt capital, lower volume and margin guidance and an "unattractive" dividend yield.

However, Just's year-to-date underperformance of 50% relative to the insurance sector prompted analysts at JPMorgan to look at the downside potential.

To assess that, JPMorgan focused on looking at the intrinsic value of the back book, arriving at a base case value of £640m for the book at the end of its investigation - a figure higher than the group's current market cap of £611.

"Thus, we see limited downside risk to current share price and move our rating to 'neutral'," said analyst Ashik Musaddi.

"Looking at the DCF of the back book (i.e. business written as of date), we get to back book valuation of £1.1bn which is a discounted figure for capital run off and back book spread earnings."

JPMorgan, which reduced its 2019 EPS estimates for Just Group to 9.87p due to incorporating increased finance cost in its model, also adjusted its price target on the firm from 86p to 78p.

"We value Just Group’s shares at Dec-19 PT of 78p using unlevered PE multiple of 9x and deducting debt at face value. Given Just Group has high leverage to macro risk and relatively weaker capital position we believe that a high cost of equity is justified in valuing Just Group."