Aviva share price 6% off year-to-date high – but is a rally in sight?

Aviva’s [AV] share price was down again at the close of Tuesday’s trading, as a week of gains that followed an announcement of significant management change came to an end. 
 
The board announced that new CEO Maurice Tulloch would carry out a review and implement “an appropriate management structure” on 24 April, which sparked an initial slump in the share price the following day, before it grew around 1.2% during the week ending 2 May.Aviva 1-year share price performance, CMC Markets, 08 May 2019

This is the first sign of significant changes after Tulloch took over in March, and investors will hope his strategy will revive the share price back to May 2018 levels. Of particular interest is Tulloch’s broadening of the leadership team to include more business unit leaders; the latter is seen as an attempt to imbue the company’s strategy with “greater energy”. 

One of the changes will see UK chief Andy Briggs, step down. Briggs will “remain with the Group until 23 October 2019 to support an orderly transition.” Angela Darlington, currently Aviva’s Group Chief Risk Officer, will become interim CEO of UK Insurance.

According to the company, Colm Holmes, CEO of Aviva Canada and Global Corporate & Speciality, and Patrick Dixneuf, who becomes CEO of Aviva’s European businesses and remains as CEO of Aviva France, will join Aviva’s Leadership Team. Aviva will not seek to appoint a new CEO International (the role vacated by Tulloch as he became Group CEO).

How are shares responding?

Responding to the news on 24 April, Shore Capital reaffirmed Aviva as a “hold”, valuing the shares at 430p. Shore Capital analyst Paul De’Ath told Citywire that the new CEO “has a tough job ahead to inject a greater pace of change into an organisation that could still be feeling ‘change fatigue’”.

“[Tulloch] has a tough job ahead to inject a greater pace of change into an organisation that could still be feeling ‘change fatigue’" - Shore Capital analyst Paul De’Ath

“The group is the one true composite in the UK but the tangible benefits of this have yet to be exploited other than in capital diversification,” the analyst said, adding debt repayments were “a better use of excess capital than share buybacks and should help to move the return on equity closer to that of peers”.

Especially after the recent dip, Aviva stock may be cheap, however; the insurer enjoys a P/E ratio of 11.01 compared to industry and sector averages of 14.44 and 20.45 respectively. Despite reporting profit growth in its full-year earnings, the share price remains low thanks to its lack of a chief executive between October and March, flat operating profit in key insurance units and an expectation of “muted” growth in 2019.

Aviva stock vitals, Yahoo finance, 08 May 2019

Motley Fool analyst Roland Head wrote: “Concerns about Aviva’s lack of growth are fair. But the dividend was covered comfortably by cash generation last year. In my view, this payout should be fairly safe.” 

Some of Aviva’s international businesses could reach a higher valuation in the event of a spinoff, Head said, adding he believed the firm’s shares were “undervalued”.

Overall, Aviva’s operating profit rose 2% from £3.07bn to £3.12bn thanks to its life insurance business which was up 5% year-on-year. The firm’s priority is debt reduction, according to Chairman Sir Adrian Montague’s statement; the aim is to clear £1.5bn by the end of 2022, which would save the insurer around £90m a year in interest payments. Aviva’s solvency metrics also improved in the last set of results; its solvency cover ratio is at 204%, up from 198% in 2017.

Aviva’s AGM is May 23, and half-year results, where the reshuffle could bear fruit, will be published on 8 August.