Broker tips: Close Brothers, Begbies Traynor

Analysts at Berenberg slightly lowered their target price on merchant bank Close Brothers from 1,170 to 1,100 on Thursday but stated the group appeared to be "weathering the storm".

Berenberg said for the last couple of years, Close has warned about cyclical risk, and had been preparing for it, and now that tougher times are here, it said the group did appear to be "coping well".

In the fourth quarter, the German bank highlighted that Close's loan book shrank, margins were squeezed due to lower fees, provisions were increased by £43m but still well below second-quarter levels, the market-facing business did well and regulatory capital ratios were strong.

The analysts still said Close was "a great business" and its shares were starting to look interesting, relative to their long-term average returns. But Berenberg also stated the roughly 30% valuation discount seemed to fairly price near-term risks and subdued returns.

"Close is trading at 1.2x forward book value, a circa 30% discount to its 10-year average of 1.7x. Its average RoE over that period has been 15%, which assuming a 10% cost of equity implies a book multiple of c1.5x," said Berenberg, which stood by its 'hold' rating on the firm.

"However, if returns do remain subdued over the forecast period then it is hard to understand why the shares are mispriced today."

Analysts at Canaccord Genuity slightly lowered their target price on business rescue and recovery specialist Begbies Traynor on Thursday but retained its 'buy' rating on the group.

Canaccord pointed out that over the last five trading years, Begbies earnings growth had "materially exceeded" the growth in the UK insolvency market.

The Canadian broker believes this is a function of both organic and inorganic growth driving market share by volume in its business recovery and advisory unit, coupled with a trend towards winning higher fee mandates and organic and acquired growth in the property services division.

"We expect BEG's strategy to remain a combination of investing in organic and inorganic growth going forward," said the analysts.

Between 2020-2023, Canaccord expects an earnings per share compound annual growth rate of 16.2%, to which it sees upside risk if there was to be a quicker recovery in property services than it had forecast following lockdown and the insolvency market reaches 2009 levels and accretive acquisitions are made.

The implied upside to our new 122p target price, down from 128p, was 22%, with the total shareholder return was projected be 25%.