UK watchdog the Financial Conduct Authority has opened an investigation into six life insurance firms after wrapping up a report on how long-standing customers are treated and concluding, in the words of acting CEO Tracey McDermott, that “the practices at some firms appear to have been poor.”
Abbey Life, Countrywide, Old Mutual, Police Mutual, Prudential and Scottish Widows are all in the spotlight. Abbey Life and Old Mutual will be subject to a broader probe than the others, the FCA added, although all will have their practices examined as far back as 2008, write Katie Martin and Caroline Binham.
The FCA said:
These investigations have been commenced in order to enable the FCA to establish the reasons for the practices within firms; whether customers have suffered detriment as a result and how widespread any practices are within the six firms. No conclusion has been reached as to whether there have been any breaches of regulatory requirements. The commencement of investigations should therefore not be taken to indicate that they will necessarily result in disciplinary action against the firms involved nor does it indicate that a penalty will inevitably be imposed or that redress will be payable.
The report that the FCA has published today looked into a broader set of insurers and sought to establish whether customers get “clear and timely communications” about policy features, and whether it is easy for customers to switch from one product to another.
The FCA said it had found that firms were good in some areas but poor in others. A particular issue was six firms’ communication with customers when they requested to surrender or transfer a policy.
Although most exit or other fees did not apply in most cases, the FCA is now concerned that in some cases customers may not have been aware fees applied; hence an enforcement investigation to determine more facts. Investigations can lead to fines on firms and penalties like fines and bans on individuals if wrongdoing is found.
The whole issue has been mired in controversy for months, and not just for the insurers.
Nearly two years ago, news that the FCA was planning a probe into the matter caused insurers’ share prices to fall sharply. The manner in which news of this investigation, through an early briefing to the Daily Telegraph, emerged ended up with the FCA being labelled “dysfunctional” by MPs. It also attracted the fury of chancellor George Osborne.
Shares in Whitbread, the leisure company behind Costa Coffee and Premier Inn, have fallen nearly 4 per cent in early trading on Thursday after the group posted another disappointing set of quarterly sales figures, particularly at its coffee chain.
Costa, which had experienced runaway growth over the past few years, only managed to eke out a like for like sales improvement of 0.5 per cent in the 11 weeks to February 11, the company’s final quarter. Whitbread blamed this on unusually warm weather this winter while it said footfall on high streets had fallen.
Analysts had been expecting much more robust growth of 3 per cent at Costa in the final quarter. Like for like sales growth at Premier Inn also disappointed in the final quarter, coming in at 2.2 per cent compared to expectations of 3 per cent.
Consumer analysts Mark Brumby at Langton Capital said the coffee market in the UK was maturing. He said in a note this morning:
Slowing Costa sales are likely to grab the headlines.
This should not have been unexpected (given the warm weather, particularly in December) but, whether it was factored into share prices or not will be seen later this morning.
The numbers are by no means poor but the reality of the situation is that, in addition to the warmer weather derailing short term numbers, the coffee market in the UK must be more mature than it was, even if it is not mature in the absolute sense of the word.
Alison Brittain, who took over as chief executive of Whitbread in December last year, has had a difficult start to the new job. She also had to present a disappointing set of third quarter results shortly after taking over the top job from Andy Harrison.
* Clarity of message: We have spent 2 days in roadshow meetings with the
CFO. The one consistent message that impressed us was the conviction in
the long term growth opportunity for the sector and how Capgemini can
differentiate itself within that structural growth trend. In particular,
management believes that most major industries are striving for efficiency
gains and that will lead to greater standardisation and industrialisation. As
part of this process, non-core activities will get outsourced to third parties like
Capgemini. This will support medium term growth. Companies like
Capgemini that can offer appropriate resourcing (to reduce labour costs) and
global scale will be best placed to take advantage of this trend.
* Risks overplayed: The other key message was that there are no major
signs of macro risks. Consulting has had one of the best starts to the year
ever. This is normally seen as a leading indicator and demonstrates that
there are no immediate pressures. There is weakness in Brazil but it is only
3% of group revenues. Similarly, there are investor concerns regarding the
outlook for investment banking, but Capgemini's financial services exposure
is largely insurance and retail banking so the risks appear modest. Even if
there is a slowdown, management remains convinced that the depth of client
relationships means there will be limited margin volatility through the cycle.
* Undemanding valuation: We believe that Capgemini is the best positioned
IT services company in Europe and against that backdrop the current
valuation is undemanding. In particular, the current FY16 FCF yield of 5.5%
for a company with solid organic growth prospects and scope to drive
through margin enhancement looks undemanding. Hence we reiterate our
Outperform rating. We have updated numbers for the full financial
statements.
* We maintain our Underperform rating: We cut our 2016-18E EPS
forecasts c1-5% on minorities and overheads following FY-15 results on Feb
26th. We cut our TP to €14.3 (from €14.7). Our investment case remains:
1. Landfill to stifle a waste recovery: We see expectations of leverage to a
cyclical recovery as overly optimistic. We think the landfill decline in France
will accelerate following recent policy changes and see c€150-200m of
EBITDA at risk, with c200bp downside to European Waste EBITDA margins.
2. International growth could slow: Our analysis suggests a c40% decline
in reported contract wins in 2015 (annualised €-revenue) in International, the
fastest growing segment. Lower commodity prices may negatively impact
customer demand for new projects, with an indirect impact on Suez.
3. Low growth in municipal Water: Efficiency drives through-cycle volume
declines in Europe. Pricing growth is largely in-line with inflation, which
remains very low. Growth from urbanisation in Chile seems already to have
come through. We see no near-term source of growth in municipal water.
4. A competitive market for M&A: We see up to c€1bn in M&A firepower
over 2016-18E and Suez has said M&A could support growth. But return
requirements are high and competition is high. We see downside risk to
Suez' €3bn 2017E EBITDA ambition absent near-term acquisitions.
* We watch for policy changes. We estimate the current run-rate of landfill
reduction in France will need to rise almost twofold if French and European
targets are to be met. We watch for a potential increase in the landfill tax.
* Valuation: Suez trades at c19x 2017E EPS with a dividend yield of 4.1%.
PEG, and P/B analysis suggest c25-40% downside; our Credit Suisse
HOLT® valuation has >c50% downside. We continue to see a recovery in
returns more than priced into the stock.
Bet on Value Cautiously,Trim Momentum Selectively
In February, we have observed a broad rotation away from momentum and towards value. This note suggests ways to trim momentum exposure selectively and make a cautious bet on value
Broad rotation away from momentum and into value. Value factors have performed well in both Europe and APxJ & EM in February, but not in Japan. Price momentum has experienced a substantial reversal across regions, high
daily volatility. High quality/ low beta has outperformed junk/high beta in developed markets, while the opposite occurred in APxJ & EM, and mega/large caps have underperformed small caps globally. In that environment, our MOST model has performed well in Europe and APxJ & EM (Q1-Q5 spreads of +1.7% in both regions), but poorly in Japan.
Limited visibility, but improving margins & undemanding valuation. Buy, TP €127=>117
SG view On 18.3x 2016E PE we think Henkel is undeniably cheap, trading at a 17% discount to Global Consumer Staples. However, near term visibility is also undeniably limited given recent management changes, macro uncertainty and the fact that for two years in a row Henkel’s EBIT margin expansion has been just 40bp, in line with peers but far short of historical rates. But then again historically it has been precisely such periods of macro uncertainty (Eurozone crisis in 2012, Russia in 2014) that have offered attractive entry points for Henkel. However we acknowledge that markets will likely wait for evidence that, once China headwinds are lapped, cost-cutting can continue to drive near best in class margin expansion at Henkel before giving it valuation credit.
How we value the stock Given lack of macro visibility, we value Henkel on a 5% discount to global Consumer Staples peers. This is 21x 2016e PE. Rolling this multiple onto our 2017e EPS number (to reflect the 12 month time horizon of our target price) yields our €117 price target, down from €127. We have trimmed 2017e EPS by 6%, half driven by FX and half by cuts to our margin forecasts (we had expected a margin beat for FY15).
Events, catalysts & risks to price target, rating & recommendation Next catalyst: Q1 16 results on 19 May 2016. See page 3 for risks.