The QBE Insurance Group Ltd (ASX: QBE) share price is clawing back some of yesterday's devastating losses as top brokers voiced their views on the company's trading update on Tuesday.
The QBE share price added 0.9% to $10.05 during lunch time trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index added 0.7% while other insurers like the Insurance Australia Group Ltd (ASX: IAG) share price, Medibank Private Ltd (ASX: MPL) share price and Suncorp Group Ltd (ASX: SUN) share price also enjoyed good buying support.
The bounce in QBE's share price stands in contrast to the drubbing it suffered yesterday as it shed more than 4% of its value and was the worst performer on the ASX 200.
What spooked investors
Investors were put off by management's trading update that included the sale of some of its non-core businesses, changes to its reinsurance program and a $130 million cost savings drive.
While these measures are aimed at improving shareholder returns, investors were put off by the near-term earnings hit from implementing these changes.
The update also introduced doubt about the recovery path of QBE and it's worth noting that the company has a history of disappointing investors.
Brokers overwhelmingly positive
But several top brokers have come out in defence of QBE with Morgan Stanley stating that the market reaction to the update was "overdone" as the broker reiterated its "overweight" call on the stock with a $12.50 price target.
"QBE's business momentum is looking the best we have seen in a decade," said Morgan Stanley. "Trading at 10.3x FY19e and offering a 6.2% yield QBE offers value. We have increasing confidence in QBE meeting FY18e expectations."
Macquarie Group Ltd (ASX: MQG) has also come out to bat for QBE by reaffirming its "outperform" recommendation on the stock and saying that the savings from the change in its reinsurance program is better than what investors are thinking.
It also pointed out that the cost-savings initiative focuses on "high quality" items that won't leave much revenue risk.
"Despite [yesterday's] setback, the trajectory is now set for EPS [earnings per share] growth lending to cost-out, premium rate rises and smaller exposure to high risk businesses," said the broker who has a $12 a share price target on the stock.
Credit Suisse blamed the negative market reaction to QBE on management's conservative approach to the update but believes that this is a good thing.
"We are encouraged by QBE's decision not to provide some aspirational three-year profitability targets, which have historically impressed the market on the day but have led to the ongoing disappointment in the years that followed," said Credit Suisse.
"In a favourable operating environment and lacking large aspirational targets, we believe earnings risk is now skewed to the upside for the first time in over five years for QBE."
The broker restated its "outperform" call on QBE with a price target of $13 a share and believes QBE is cheap as it is trading at around a 20% discount to the ASX 200.
