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Why the AUB share price is rocketing higher today

The AUB Group Ltd (ASX: AUB) share price surged during lunch time trade to become one of the best performers on the ASX.

The AUB share price jumped 5.4% to $12.07 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index inched up 0.4% at the time of writing.

The insurance broker joins other outperformers such as the Nearmap Ltd (ASX: NEA) share price and the Emeco Holdings Limited (ASX: EHL) share price after Credit Suisse upgraded the stock.

Turning a corner

The problem child may be redeeming itself following its annual general meeting with the broker upping its recommendation on the stock to “outperform” from “neutral” and increasing its price target to $12.75 from $11.45 a share.

“Having considered AUB as an earnings downside risk company in recent periods, we were encouraged by the update and the stabilising of some of the problem areas,” said Credit Suisse.

“With the core business still delivering earnings growth and initiatives to improve efficiency across the business, earnings risk can switch from downside to upside in coming periods.”

Stock trading at a discount 

The problems plaguing AUB were self-inflicted and came at a time when industry conditions were good. But confidence in management is returning after it indicated that Australian commercial lines premium rates will increase by 4% to 5% in FY20.

This was inline with Credit Suisse’s expectations and showed that there’s still life left in its core business.

The outlook for AUB’s “risks services” isn’t quite as bright but given how much this business has rebased, it shouldn’t be too much of an issue.

“AUB’s share price has underperformed the market by ~30% over the last 12 months, following a series of earnings downgrades,” added Credit Suisse.

“The stock has traded sideways in the last five months, slightly below the broader market. With previous headwinds being addressed, the 15% P/E discount to the XSI [Small Industrials Index] is no longer justified in our view.”

Re-rating opportunity

The interesting thing is that the increase in Credit Suisse’s price target isn’t from an upgrade in the broker’s earnings forecasts for the company. The increase is primarily due to the removal of a “discount” that the broker had put on the stock to account for its riskier investment profile.

Credit Suisse is forecasting growth in AUB’s net profit after tax (but excluding acquired intangibles) of 9%, which is in the middle of management’s guidance range of 8% to 10%.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Nearmap Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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