Broker tips: Barclays, IAG, Bellway

HSBC downgraded Barclays to ‘hold’ from ‘buy’ and cut the price target to 190p from 230p to reflect disappointment over the bank’s dividend decision and the uncertain background for investment banking earnings.

“The restructuring story has been clouded by management’s decision to cut 2016-17 dividends to 3p, which is less than half the current year payout,” HSBC said.

Earlier this month, Barclays confirmed plans to sell its African business as it announced a 2% drop in full year profit and said it would slash its dividend.

Nevertheless, HSBC said Barclays’ restructuring plan is coherent and will ultimately deliver a slimmed down group with acceptable profitability.

It argued that the proposed divestment of Barclays Africa Group Limited, whilst creating a void in the earnings line, should at least remove uncertainty regarding capital adequacy.

“Theoretically at least the upside from the elimination of non-core businesses should be considerable, but it doesn’t look imminent,” said HSBC.

HSBC cut its earnings per share forecasts for 2016-2017 to 11p and 23p from 24p and 33p, respectively.

Goldman Sachs said it expects International Consolidated Airlines to generate strong free cash flow (FCF) over the next two years.

The British Airways owner’s valuation is attractive in the context of growth and returns, according to GS analysts.

The analysts said the company’s growth would be driven by an improving load factor and premium volumes, higher first quarter margins and moderating industry summer capacity growth.

“IAG continues to strengthen its competitive position and medium-term return on capital prospects by improving its unit costs (fourth quarter unit cost excluding fuel -3.9%), increasing its exposure to concentrated markets (North Atlantic, Heathrow) and playing an active role in industry consolidation,” the bank said in a note to investors.

“We expect strong FCF generation over 2016 to 2018 (average 9.5%) to underpin its dividend policy (25% payout; 4% yield) and support progressive deleveraging, thus strengthening further its balance sheet (2017E adjusted net debt/EBITDAR of 1.5x).”

Goldman reiterated its ‘buy’ rating and raised its target price to 810p from 775p.

Bellway’s shares gained on Tuesday as Canaccord Genuity reiterated its ‘buy’ rating and 3,390p target price after the housebuilder’s first half profits beat expectations.

In the six months to the end of January, pre-tax profit rose 42.6% to £226.6m, beating Canaccord’s forecast of £216m.

Revenue rose 30.5% to £1.08bn as the number of homes sold was increased 11.6% to 4,188 compared with 3,754 the year before, while the average selling price increased 17.3% to £257,280.

Earnings per share came in at 148.7p from 103.5p in the same period a year ago and the company lifted its interim dividend 36% to 34p per share.

The interim dividend was raised 36% to 34.0p.

Bellway said the outlook was positive and housing completions for the full year are expected to increase by at least 10%, as is the average selling price. The operating margin, meanwhile, should approach 22% for the full year.

“We would expect consensus PBT to move up by around +5% on the back of these results. Reassuring set of results and outlook comments overall,” said Canaccord analysts Aynsley Lanmin and Matthew Walker.