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RSA recovery on track as earnings loom

RSA will reveal its third-quarter results on 5 November, and the stock has been struggling ever since Zurich pulled its takeover bid.

City of London
Source: Bloomberg

Stephen Hester is slowly turning the company’s fortune around, and his ‘action plan’ is already showing signs of working. The troubled insurer announced a 317% jump in first-half profits in August, as Mr Hester trimmed the company’s Asian business and is focusing on the core markets like the UK and Ireland.

Under Mr Hester’s leadership the company raised £750 million to shore up its finances, and that was vital to improving investor confidence. The firm reinstated its interim dividend which, not only pleases shareholders but also sends out the right message that the company has a strong cash flow.

Mr Hester played a key role in turning around RBS, and we are seeing similar success at RSA. Zurich was interested in acquiring RSA, but the cost incurred due to the explosion at the Chinese port of Tianjin made the Swiss company rethink the move. The fact that Zurich was even contemplating the move shows that Mr Hester’s plan is working, and I wouldn’t be surprised if other companies show an interest in RSA.

RSA will post its full-year numbers in February 2016, and dealers are expecting revenue of £6.91 billion and adjusted net income of £326 million – this compares with last year’s revenue and adjusted net loss of £11 million. The firm will also reveal its second-half numbers on the same date, and traders are anticipating revenue of £3.59 billion and adjusted net income of £109 million – in the first-half the company had revenue and adjusted net income of £3.44 billion and £71 million respectively.

Investment banks are moderately bullish on RSA, and out of the 19 ratings, five are buys, 11 are holds, and three are sells. The average target price is 453p, which is 7.8% above the current price. Equity analysts are very bullish on Aviva, and out of the 21 recommendations, 15 are buys, five are holds, and one is a sell. The average target price is £6.04, which is 24.5% above the current price.

RSA’s share price has been in a downward trend for a number of years. The 390p mark is the first target, with 336p the next level to watch. The previous support at 420p is now acting as resistance, and a move above it will bring 485p into play.

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