JPMorgan cuts L&G price target but maintains 'overweight'

(Sharecast News) - JPMorgan Cazenove slashed its price target on Legal & General on Monday to 285p from 330p as it cut its estimates significantly after the company's June capital markets day. JPM said the sell-off in the shares since the CMD has been disappointing.

However, it remains 'overweight', "even if some patience may be required, as: 1) The new strategy makes a lot more sense to us and removes unnecessary complexity; 2) We expect L&G to exceed its new EPS growth targets; and 3) We think the £200mn buyback is sustainable and the stock's capital return yield (10.5%-11% 2025E) limits downside valuation risk."

The bank said the main driver of its lower forecasts is the assumption that L&G will invest in Asset Management, to grow distribution and private debt capabilities, resulting in a rising cost-income ratio and 8% compound annual growth rate in Asset Management operating costs.

"This compares with our previous expectation of a declining cost-income ratio," it said. "We lower our 2024-26 operating profit estimates by 8-15%; however, the Street has also started adjusting and our estimates are now close to Bloomberg consensus."

JPM said it thinks L&G can beat its new earnings guidance. The bank expects L&G to maintain its strong market share in a very active UK Pension Risk Transfer (PRT) market, with operating profit growth at the upper-end of L&G's 5%-7% CAGR guidance (2023-28E).

"We anticipate asset management profits at the upper-end of management's £500m-£600m 2028E guidance with modest asset growth and a higher cost-base," it said.

It forecasts Retail earnings to also grow at the upper end of 6%-8% (2023-28E) CAGR guidance, with resurging demand for retail annuities and structural growth in Workplace Pensions.