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Direct Line receives thumbs up from Morgan Stanley and RBC

Two brokers have initiated coverage of Direct Line Insurance Group with positive recommendations and prices targets that point to 16%-19% cent upside from the stock’s current valuation.

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Two brokers have initiated coverage of Direct Line Insurance Group (LON:DLG) with positive recommendations and prices targets that point to 16%-19% upside from the stock’s current valuation.

The interest in the £3 bn insurer follows its demerger from Royal Bank of Scotland (LON:RBS), a move forced on it by Europe after receiving state bailout during the financial crisis.

Starting its coverage with an overweight rating, Morgan Stanley told clients: “In our view the shares are inexpensive, with upside driven by restructuring and capital management.”

Its price target is 236 pence a share, while its dividend projection points to an 8.3% yield by 2014, making it a potentially interesting large-cap income play.

Direct Line has the opportunity to significantly raise the dividend and return excess capital to shareholders from 2014 as the restructuring costs start to fall away,” Morgan Stanley added.

RBC Capital Markets, meanwhile, kicked off its research on the stock with an ‘outperform’ recommendation and 230 pence a share price target, with an “upside scenario” of 250 pence and “downside” target of 164 pence.

The broker points out the business has the “advantage of scale”, which sets it apart from many of the other listed general lines insurers.

At the same time the strength of the main Direct Line brand gives it an advantage over its rivals, particularly those reliant on price comparison sites for their business.

“[This] allows it such strong recognition that it is not currently sold on price comparison sites, which is positive as customers who use price comparison websites are more likely to switch insurance provider more often,” the broker said in a note to clients.

At 1.30pm, the stock was changing hands for 197.5 pence for a rise of 2 pence. This values Direct Line at £2.96bn.

Quick facts: Direct Line Insurance

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LSE:DLG

Price: 289.7 GBX

Market Cap: £3.89 billion

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