UBS upgrades Phoenix Group to ‘buy’, shares spark

Phoenix Group sparked on Wednesday after UBS upgraded the shares to ‘buy’ from ‘neutral’ and hiked the price target to 770p from 670p, as it said balance sheet risks are well managed and the yield is attractive.

The bank noted that Phoenix generates at least £300m per annum of excess cash above its uses.

"Currently, this excess cash is being utilised to reduce debt leverage," it said. "We expect this to be completed in circa six months (by 1H25).

"Following this, we believe Phoenix can deploy its excess cash generation into organic growth (UBSe: £100m) and excess shareholder returns (UBse: £150m p.a. share buybacks)."

UBS said that allowing for these share buybacks, Phoenix trades with a more than 10% all-in yield, which is one of the highest within the sector. The bank also said Phoenix's balance sheet screens "very resilient" to a credit downturn/recession, given management's focus on hedging interest rate and equity risk.

"Even after an extreme credit event, such as the dot com crisis, we estimate that Phoenix's group solvency position would land towards the bottom-end of its target range of 140-160%," it said.

UBS also highlighted a favourable valuation on return on own funds and growth prospects.

"Within our UK life insurance coverage, Phoenix screens with the highest return on solvency II book value relative to its price to book," it said.

UBS said it also forecasts 10% growth in Phoenix's free cash flow/capital generation over 2027-29 - the highest in the subsector - before allowing for any incremental deployment for organic growth.

At 1040 GMT, the shares were up 4.1% at 724.50p.