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RSA to reveal cost-cutting plans

The company will report its full-year figures on Thursday 26 February, and a large reduction in costs is expected to be announced. 

London Stock Exchange
Source: Bloomberg

Stephen Hester, formally of RBS was drafted in to save the struggling insurer last year after a financial black hole was discovered in the company’s Irish operation. Mr Hester has been in the top job less than one year but has already nursed the firm back to profitability with the company reporting a first-half profit of £69 million. This compares with a loss of £494 million last year.

Mr Hester was instrumental in putting RBS on the road to recovery and the market is expecting similar success at RSA. During his time at the helm of RSA he has raised nearly £750 million through a rights issue in order to shore up its finances. A number of non-core businesses were sold off in order to free up capital, and that process is expected to continue. The London-listed insurer has announced plans to sell its Italian business, and it is in talks with UBS to assist the sale of its Middle Eastern business. The insurer is planning on focusing on the UK, Ireland, Latin America and Canada.

RSA has an annual cost base of £2 billion, and has hired management consultants McKinsey & Company to explore cost-cutting options. The company already plans to cut costs by £180 million, and traders are expecting that target to be increased. The turnaround plan and additional details about cost-cutting will be at the forefront of traders’ minds.

The consensus is for revenue of £7.69 billion and adjusted net income of £198 million when RSA announces its full-year numbers. These forecasts represent an 11% drop in revenue and a 332% jump in adjusted net profit. The firm will also report its second-half figures and dealers are expecting revenue of £3.95 billion and adjusted net income of £153 million, which compares with the first-half revenue of £4.01 billion and adjusted net profit of £4 million.

Investment banks are bullish on RSA, and out of the 22 recommendations, five are buys, 11 are holds, and six are sells. The average target price is 475p, which is 5% higher than the current price.

Equity analysts hold a more bullish outlook for Aviva, and out of the 20 ratings, 10 are buys, five are holds, and five are sells. The average target price is £5.85, which is a 6% above the current price.

The stock is trading at 450p which coincides with the 200-hour moving average. If this level is held it will become support and the initial target will be 460p, and beyond that 470p. A drop below the 200-hour moving average will bring the downside support at 440p into play, and if that level is punctured then 430p will be the target. 

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