PZU: Long-term ROE outlook unchanged (upgraded to BUY)

We have upgraded PZU to BUY, from Hold, and tweaked our 12M price target (PT) slightly, to PLN 51.7 (up from PLN 51.1). We see 37% upside potential and a total return of well above 40% if we add the return of a 2017 DPS of PLN 2.5. In our view, the recent sell-off in the name was triggered by a number of factors that, in our view, should not affect the long-term outlook for the company. We see: i) weak equity markets (WIG down c.8% ytd); ii) the Supreme Court ruling; and iii) noise related to the potential merger of Alior and Pekao being the key negatives of the past few months. While we have cut our 2018E net profit forecast by 9% based on a lower investment result, we have kept our 2019E forecast almost unchanged; in our view, the medium-term outlook remains very much unchanged. Even on our cautious 2018E net profit forecast (now at PLN 2.96bn), PZU trades at 11.0x P/E, almost on a par with its European insurer peers. However, as the group represents a much better medium-term growth profile, we see this turning into a c. 8% discount on our 2019E P/E ratio of 9.5x.