A Direct Line to blue chip status
WITH promotion to blue chip status expected to be confirmed next week, Churchill insurance firm Direct Line got an additional lift from a broker upgrade on expectations that shareholders will continue to be rewarded by special dividends.
Nomura upped its rating for Direct Line to buy from neutral in a sector review, naming it as its preferred stock to gain exposure to the special dividends currently being offered by UK non-life insurers.
The broker said it also expects Direct Line’s exposure to an upturn in UK motor insurance premium rates to be a catalyst to potential further outperformance by the stock, albeit with the shares having already booked the strongest performance among UK insurers in the year to date.
In terms of sector valuation, Nomura said non-life peer RSA Insurance screens relatively better, however its preference is with Direct Line owing to its exposure to UK motor rates.
The broker pointed that while blue- chip Admiral is the most exposed insurer to a potential turn in UK motor rates, it believes that in the near term, a lower reserve release and investment in its US operations will be a headwind to its earnings.
Nomura downgraded its rating for Admiral to neutral, and its shares declined 4p to 1335p.
Direct Line shares were up 9.7p to 298.9p helping fuel expectations that the insurer, which was spun out of Royal Bank of Scotland in October 2012, is on course to win its place in the FTSE 100 when the latest quarterly index reshuffle takes place on September 3.
Direct Line could enter the blue chip index at the expense of either drink can manufacturer Rexam, up 1p to 507p, or housebuilder Barratt Developments, down 1.5p to 369.9p. The leading FTSE 100 faller was Tesco, down 16.35p to 229.95p, after the retail giant shocked the City by cutting its profit forecasts once again and warning that it will slash its half year dividend by 75pc.
The latest downgrade from the beleaguered supermarket chain triggered heavy losses for stocks across the sector, with Sainsbury’s dropping 13.2p to 290.3p, Morrisons down 9.4p at 177.5p, while Marks & Spencer dropped 8.2p to 429.9p.
Overall the FTSE 100 index registered gains on the final session of the month, closing up 13.95 points at 6,819.75, albeit off highs as US blue chips made weak progress early on.
European markets were also lower as expectations that the European Central Bank might unveil fresh stimulus measures for the flagging euro zone economy were dented slightly by in line inflation and unemployment data for the region.
Pharmaceutical group AstraZeneca was a top FTSE 100 riser amid persistent speculation that US rival Pfizer could return for a second takeover attempt after the firm spurned a £69bn offer earlier this year.
AstraZeneca shares climbed another 87.5p higher to 4567p, while fellow blue-chip drugmaker GlaxoSmithKline also gained, up 11.5p to 1474.5p.
While the blue chips found modest gains, the mid caps were under pressure, with the FTSE 250 index closing 25.14 points lower at 15,885.72. Material testing and calibration firm Exova Group was the biggest FTSE 250 faller, plunging 10pc, or 22p lower to 193p after it said ongoing production related delays from aerospace clients and lower levels of projects from transportation clients in the Americas would hold back underlying organic growth this year.
Berendsen, which provides work uniforms and industrial laundry services, was also under pressure, shedding 23p to 1067p as it reported lower half year revenues and warned that currency volatility would continue to affect results.
Confounding the odds, gaming giant Bwin. party was the top mid cap performer, jumping 12.66pc, or 10.15p, to 90.3p with investors cheered by a solid performance from its sports betting division although it posted a widening in its first half losses, reflecting a fall in casino and poker revenues.
Among the small caps, investment firm Worthington Group soared nearly 885pc higher as trading in the stock resumed for the first time since November 2013, leaping 28.75p to 32p. Worthington said it swung to a profit in the first half after making a gain on the acquisition of its stake in a legal claims company, and said it is in discussions to make investments in a number of other sectors.
But on the downside, Enegi Oil was a big casualty, losing 6pc or 0.25p to 3.88p with investors wary after it revealed it is considering an offer to ‘ partially divest’ itself of its exploration interests in western Newfoundland and focus on the North Sea. CASH shell Evocutis soared 140.5pc higher to 0.44p with serial AIM entrepreneur David Lenigas set to join as executive chairman. The company, the remnant of a medical tech firm, is getting a £210,000 injection and will undergo a capital reorganisation as it adopts an investment strategy to focus on natural resources assets in Europe. Market speculation suggested the vehicle might become the latest to get involved in the Horse Hill shale oil project near Gatwick.