* Update We are downgrading Allianz from Hold to Sell as we expect PIMCO’s earnings to come under pressure in 2014, disabling Allianz’s main growth engine. Coupled with the lacklustre growth prospects of its insurance operations, we see group earnings stagnating in the medium term, while we see better momentum with other stocks, especially those more positively correlated with US economic recovery.
* SG view US recovery has been one of the main drivers of stock specific performance in 2013 and our economists expect this to continue in 2014. While we see this as positive for stocks vulnerable to low bond yields, such as Axa, Aegon and Prudential, we see it as a threat to Allianz because of its dependence on PIMCO, which we think is now facing a very difficult environment after many years of extremely strong performance helped by low interest rates. In this report, we highlight that the likely loss of much of PIMCO’s performance fees, as well as the likelihood of continued outflows, especially in its core funds, will cause its operating earnings to fall by 10% in 2014, disabling Allianz’s main growth engine. In addition, we expect limited growth in its insurance operations, which are concentrated in mature, low growth European markets with a significant exposure to low German yields. The question we ask investors is why own Allianz now? The stock is not cheap by sector comparison in our view (trading on sector average spot multiples of 1.4x 2014e P/TNAV with a 14% R/TNAV and P/E of 10.3x), and is facing a period of unattractive earnings stagnation.
* How we value the stock
We are reducing our target price to €118 (from €125) to reflect our 3% cut to earnings in 2014 (6% in 2015), bringing us below consensus. We value the stock using a SOTP model that uses cross-cycle assumptions and an explicit growth rate for 7 years. Inputting €5.22 2013e DPS gives a -8% 12m projected TSR, putting the stock in the SG Sell rating band.
*Events, catalysts & risks
Q4 results are on 27 February. The key risks to our recommendation and target price are a reversal of US economic recovery and a fall in US bond yields, and better than expected performance in its insurance units.