Why this broker tips IAG (ASX:IAG) shares as a buy in 2022

Let’s dive in and analyse further.

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Key points

  • IAG is coming off a troublesome year in 2021 both in operations and on the charts
  • Despite the turbulence, the team at Citi are bullish on the stock
  • The broker retains its buy rating and values the company at $5.60 per share today.

Shares in insurance giant Insurance Australia Group Ltd (ASX: IAG) are trading down today and are now less than 1% in the red at $4.47.

IAG shareholders endured a challenging year in 2021, with shares collapsing from a top of $5.45 in September to close out the year at $4.26.

A suite of fresh scandals and a number of catastrophic weather events put IAG’s margins and income potential under pressure last year, not to mention the impacts of COVID-19.

Despite the calamity-causing events last year, the team at investment bank Citi are bullish on IAG and reckon it could be a buy in 2022. Let’s take a look.

Is IAG a buy in 2022?

Citi reckons it is right now, noting the insurance giant’s share price should perform better this year than it did in 2021.

The broker likes Citi’s new growth and diversification strategy, however acknowledges some short-term headwinds present in the form of inflation.

Not only that, the likelihood of a shifting rates regime instigated by the Reserve Bank of Australia (RBA) could be a net positive for IAG as well, whereas the current rates environment is sturdy, Citi says.

In its analysis, Citi also notes that price increases on the company’s catastrophe program is likely to remain bound within the low to mid-single digits, and reckons that there could be some positive news regarding its business interruption cases argued by plaintiffs against IAG in the courts last year.

With these macro-economic drivers in place, analysts at the firm believe IAG is poised to deliver a period of upside this year, especially coming off such a low base in 2022.

In its view, “these factors coupled with some likely benefit from rising interest rates should be enough to drive the stock price higher in 2022”, per the note released to clients today.

The broker retained its buy call and values IAG at $5.60 per share, alongside Credit Suisse and Macquarie, who value the company at $5.94 and $5.10 respectively.

Despite the positive sentiment, analysts at Morgan Stanley are more reserved on IAG for 2022. It rates IAG as a sell, noting substantial downside risk from the company’s recent perils activity, as well from catastrophe risk.

It notes this because IAG has pivoted its business into more short-tail lines of revenue, which also provides less of an earnings shield to the company.

IAG share price rating summary

Inspecting a list of analysts provided by Bloomberg Intelligence, 8 have IAG as a buy, whereas 2 have it as a hold and sell respectively.

Most of the price targets for IAG are concentrated around the $5-$6 mark, however, Morgan Stanley’s valuation is well below the pack and is 58% from the highest valuation set by Credit Suisse.

The consensus price target based on this list is $5.17 per share, implying a 16% margin of safety at the time of writing.

IAG shares are down 11% in the last 12 months, even after climbing 5% since January 1.

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The author has no positions in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended Insurance Australia Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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