FTSE dips ahead of ECB meeting but Aviva gains after results

Insurer beats forecasts and suggests bolt-on acquisitions or returns to investors

Aviva leads FTSE 100 risers
Aviva leads FTSE 100 risers Photograph: Ben Stansall/AFP/Getty Images
Aviva leads FTSE 100 risers Photograph: Ben Stansall/AFP/Getty Images

Last modified on Thu 10 Mar 2016 05.00 EST

As markets hold fire ahead of the day’s European Central Bank meeting, where more stimulus measures are expected, Aviva has gained ground after its full year figures.

The insurer has added 24p to 483.6p as it beat forecasts with a 20% rise in operating profits and said its strong capital position meant it could make bolt=on acquisitions or return cash to shareholders. Last year it paid £5.6bn for Friends Life, and said it would achieve its integration target in 2016, a year ahead of schedule. Barclays analysts said:

The company expects to achieve £1.2bn of capital synergies from the Friends deal of which £400m of diversification benefit is already achieved. As a result Aviva expects its UK life company to remit £1bn of cash over and above its normal run-rate over the next three years. The chief financial officer suggested that if Aviva does not need the money to reinvest, the company will consider additional distributions to shareholders.

Goldman Sachs analyst Ravi Tanna said:

Aviva has reported a good set of 2015 numbers this morning. Its operating earnings are 7% ahead of consensus, owing to a broad-based ‘beat’. Its dividend growth of 15% is marginally below consensus expectations of 17% year on year, but the group expects £1.2bn of capital benefits, which will translate in an additional £1bn of cash remittances from UK life to group over the next 3 years. Its Solvency 2 position of 180% is ahead of our 160-170% expected range, and management actions should add 5 to 10 points to this over 2016. It also expects to achieve its £225mn cost synergy target by end 2016, a year ahead of target.

Overall the FTSE 100 is down 7.04 points at 6139.28, but much of that is due to companies going ex-dividend. These include Barclays, down 4.25p at 163.95p, Direct Line, 15p lower at 371.1p and CRH, off 43p at £18.74.

Royal Bank of Scotland is 4.6p lower at 226.8p as Bernstein cut its recommendation from outperform to market-perform and slashed its price target from 450p to 230p. It said:

The macro outlook in the world (and the UK specifically) has deteriorated significantly and in the same time, legal settlements / disposals which were the prime drivers of excess capital have been pushed out. We still like the franchise but the next 12 months will be an uphill task with deteriorating earnings fighting against elusive excess capital.

Ashtead is the biggest FTSE 100 faller on worries about the equipment rental group’s exposure to the US economy. Deutsche Bank began coverage with a sell rating, saying:

We have bearish on the US for some time, and we do not consider the non-residential market [Ashtead’s largest end market] immune from our concerns. Furthermore, analysis shows that the top 10 oil states contributed to an average of 48% of incremental construction spend (excluding power, communication and railroad) in 2012-14, driving further concerns over the US construction end markets.

We consider Ashtead to have reached peak returns on capital. We expect competition in US equipment rental to intensify, as small to mid-sized players gain increased access to cheap bank lending. As such, we anticipate Ashtead’s returns on capital to reduce over the coming years.

We think investors interested in the compelling longer term structural growth story that Ashtead has to offer should wait for a more interesting entry point.

Rolls-Royce is down 17p to 683p as Goldman Sachs moved from buy to neutral after its recent share price rise.

Among the mid-caps Amec Foster Wheeler has added after the oil and gas services group said it would sell its Global Power Group and halve its net debt of £946m in the next 15 months. Canaccord Genuity said:

Amec Foster Wheeler has delivered in-line full year results on earnings and dividend, but the excitement is in the debt line and the outlook: net debt of £959m at year-end is more than £100m better than our expectation (set with the November trading update), thanks to strong working capital inflows, the target is to halve that debt over the next 15 months in part from a disposal of GPG, and there is an outlook statement that implies EBITA for 2016 broadly in line with existing consensus.

We believe this is a very solid set of results and despite the recovery in the stock over the past two weeks we continue to see substantial upside. We are buyers with a 640p target.

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