Why Direct Line Should Accept Aviva’s Offer

Direct Line stock is up 46% this week on news of an Aviva bid, placing it above Morningstar analysts’ fair value estimate for the company.

Henry Heathfield 29 November, 2024 | 10:18AM
Facebook Twitter LinkedIn

Illustration sur des jumelles avec des éléments graphiques et un graphique de série temporelle en arrière-plan

Following Direct Line’s DLG rejection of a bid from Aviva AV., we’ve taken a closer look at the firm, its management, and strategy. Aviva’s proposal comprises £1.12 per share in cash and 0.282 new Aviva shares. We would be in favor of management taking the offer or a higher one, if one is offered.

Based on the £4.88 closing price of Aviva on Nov. 18, Aviva’s offer values Direct Line at £2.50 per share. After new share issuance, Direct Line’s shareholders would more likely receive £2.35 per share. Aviva has until 5pm. on Dec. 25 to announce a firm intention.

With the announcement, Direct Line’s share price has risen to £2.20 per share, above our £2.15 fair value estimate. The firm has not delivered persistent growth in its core divisions over the last 10 years. The 2026 normalized net insurance margin target of 13% looks challenging.

The £100 million gross cost run-rate savings target from an addressable expense base of £849 million will help, but will not be enough. Direct Line has shifted its strategy to fully adopt price-comparison website distribution in search of profitable growth and pricing discipline.

Direct Line is a no-moat business with a high uncertainty and poor capital allocation because of continued investments in technology, which have not resulted in a tangible business development that occurred for other firms. We maintain our £215 fair value estimate.

Direct Line is exiting OEM affinity motor insurance partnerships and reviewing its pet, travel, and other personal lines. With the announced sale of its commercial insurance broking business in 2023, the firm is set to focus on motor insurance, home insurance, rescue, and direct commercial.

Direct Line suspended its final dividend for 2023 earnings after it had not accurately reflected rising repair and replacement costs in its pricing. The business is now able to restart paying regular dividends with about a 60% payout and additional capital returns above a new 180% solvency.

Key Morningstar Metrics For Direct Line Group DLG

Economic Moat: None
Morningstar Rating: 3 stars
Fair Value Estimate: £2.15
Morningstar Uncertainty Rating: High
Sector: Financial Services

Direct Line Stock Price vs Morningstar Fair Value Estimate


The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Aviva PLC483.60 GBX-1.19Rating
Direct Line Insurance Group PLC249.20 GBX5.59Rating

About Author

Henry Heathfield  Henry Heathfield CFA is an equity analyst for Morningstar Inc

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures