State-owned lender Royal Bank of Scotland is floating its insurance arm Direct Line to comply with rules on state aid but should private investors buy the shares?
The flotation will represent at least 25% of Direct Line's share capital with shares offered at between 160 and 195 pence per share, giving the business a market value of around £2.66bn.
ProsThe market value is below the estimates of analysts who had expected it to fetch between £2.5bn - £3.5bn, which the Daily Telegraph's Questor says "implies it could fly", particularly as it should immediately enter the FTSE 100 and be bought by funds tracking the FTSE 100.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The business claims to have a market leading position in both home and motor insurance, with an 18% share of each. Moreover, the business intends to pay between 50% and 60% of its profits as dividends, promising a 'progressive' payout policy.
Some commentators, such as Motley Fool, have cited the example of industry rival Admiral, which rose from a start price of 275p to hit 1700p after its listing in 2004.
ConsYet conditions today aren't as favourable as back then. For example, motor underwriting isn't profitable despite representing 42% of the group's premiums. Any benefit comes from the investment income on the premiums collected.
Also, the recent referral of motor insurance to the Competition Commission could act as a deterrent given current valuations.
It should also be borne in mind that Direct Line's reported net tangible asset value of £2.5bn doesn't provide a wide margin of safety given its premium flotation valuation.
For these reasons Investors Chronicle has advised investors to "think long and hard before buying shares in Direct Line at current valuations".
CM
-
Rightmove: property asking prices hit record highNews Rising demand for top of the ladder home is boosting asking prices, Rightmove research shows. Is now a good time to sell a property?
-
FTSE 100 hits record highs – why is it rising and will we see more gains?Advice UK equities have been described as unloved for a long time but as the FTSE 100 hits new highs, we explain if now is the time to buy British.
