Aviva’s speedy restructuring makes shares attractive – analyst

Aviva’s “rapid” restructuring makes the company’s shares an attractive buy for investors, according to Panmure Gordon analyst Barrie Cornes.

Aviva is exiting and selling non-core businesses to shore up its capital base under a plan initiated last year by chairman John McFarlane, while he was running the company on an interim basis.

Most recent activity includes selling the remainder of its stake in Dutch financial services group Delta Lloyd and hiving off its US life and annuities business.

New chief executive Mark Wilson has also started to make his mark on the firm, shaking up senior management last week.

Cornes said in a research note: “Aviva is undergoing a rapid restructuring. In our view, this presents investors with an excellent opportunity to acquire shares ahead of the restructuring benefits starting to come through and the share price reacting accordingly.”

He added: “Although the previous management’s track record may account for a degree of scepticismamongst shareholders, the new management have so far delivered on its promises. We believe that the valuation gap between Aviva and its peer group will narrow during 2013 and that the 2012 final dividend will be maintained.”

As a result, Panmure Gordon is retaining its ‘buy’ recommendation on Aviva’s shares, and gives it a target price of 425p.

Aviva’s share price closed trading yesterday at 367.50p.

COR target of 97%

Cornes said he expected the company as a whole to continue to trade well – a fact he feels has been overlooked given the headline-grabbing nature of the restructuring.  

On the general insurance side, Cornes expects the group to hit its target combined operating ratio (COR) of 97% or better. This is despite poor weather in the UK in the fourth quarter.

On the restructuring, he said that half of the 16 non-core businesses earmarked for disposal have now been announced. These represent between 90% and 95% of the total capital to be disposed. “The cost reduiction plan is being executed well” Cornes said.

He added that John McFarlane had achieved his objective of boosting the capital base as the disposals had boosted Aviva’s capital surplus coverage ratio 1%to 171%. This is within the target range of 160%-175%.

Cornes noted that there has been some discussion about whether Aviva will maintain its dividend. However, he argues that the company’s full year 2012 dividend will be maintained at the 2011 level of 26p a share.