Broker tips: Hargreaves Lansdown, FirstGroup, Shaftesbury

Despite seeing material long-term potential from the structural shifts in the pensions market, Numis downgraded its recommendation on Hargreaves Lansdown to 'hold' from 'buy'.

On Wednesday Hargreaves reported interim results that showed pre-tax profit up 21% to £131m on 16% revenue growth.

This was 10% ahead of the broker's estimate of £119m and beating the consensus forecast of £121m due to better than expected cost control and the higher revenue.

Analyst James Hamilton said the 13% in assets under administration left it a little behind his forecast of £70.8bn and while net inflows were strong at £2.3bn they were short of the £2.9bn he expected.

Nevertheless he upgraded full year earnings per share forecasts 6% to 43.4p from 40.9p and 49.5p from 46.8p for 2018.

HL has delayed the launch of their savings business until at least October 2017, though management and the broker continue to see this as a "significant opportunity for growth", though the delay is said to be due to "wanting to provide customer satisfaction upon launch as opposed of speed to market given they have no competitors in this space".

For the medium- to long-term Hamilton said the shift to defined contribution (DC, retail) pension from defined benefit (DB, institutional) pensions and the move to self-investing "provide two structural growth opportunities for HL" that he equates to a potential 15% compound EPS growth "for a generation".

"With the structural growth in self provision, online investing we continue to believe that HL deserves a substantial premium valuation," the analyst said.

But while the target price was lifted to 1,497p from 1,458p the recommendation was moved down.

FirstGroup was given a boost on Wednesday after HSBC lifted its rating on the UK transport company to ‘hold’ from ‘reduce’ and increased the target price to 120p from 95p following a “reassuring” third quarter trading update.

The FTSE 250 firm on Tuesday said the trend of overall trading and expectations for the full year was unchanged, and that reported group revenue increased by 12.8% in the third quarter, benefiting from favourable currency translation.

Group revenue in constant currency was flat, with growth in North America offset by previously announced rail franchise changes and First Bus trading.

In constant currency, First Student, which runs US school buses, saw revenue grow 1.0% during the quarter and 0.5% in the year to date. Figures at its US bus service First Transit were up 5.5% for the quarter and up 4% for the year-to-date.

Long distance US coach service Greyhound was up 1.2% for the quarter, but down 2.5% for the year to date.

The UK First Rail unit was ahead 1.1% for the third quarter and 0.8% for the year-to-date.

However, the UK First Bus business saw passenger revenues drop 1.1%.

HSBC said an absence of bad weather so far in the US means the Student business “could do better than its 9% margin guidance this year, so we raise our forecasts slightly”. The bank added that FirstGroup seems to be managing wage pressures in the Student division, despite it currently running at 2.8-3%, the top end of the company’s previous 2-3% guidance.

“The Transit and Greyhound businesses are also performing as expected, with Greyhound benefiting from a modal shift as the oil price strengthens, as well as from a new yield management system,” HSBC said.

However, the UK operations remain weak, according to the bank. White the bus division has improved, it benefits from bad weather in the corresponding period and trading has deteriorated on a two-year view.

Nevertheless, there is potential for forecast increases if the group wins its bid for the South West Trains franchise, HSBC said.

The Department of Transport on 4 February said FirstGroup has been shortlisted to bid for the franchise, along with Stagecoach.

HSBC said it would “not underestimate” FirstGroup’s chances given that Stagecoach has its “own problems to deal with” on the East Coast.

The bank concluded: “We do not think shares in Firstgroup are as cheap as they look vs the wider sector, trading broadly in line with peers on cash-based multiples. But with trading having stabilised for now, no more regular trading updates due until FY results on 10 June, and the potential for a rail franchise award in the meantime, the balance of risks is changing.”

British real estate investment trust Shaftesbury was under the cosh on Wednesday after Barclays downgraded the stock to ‘underweight’ from ‘equal weight’ and cut the target price to 820p from 870p, saying it has seen more attractive valuations elsewhere.

Barclays said the valuation spread between Shaftesbury and other London-focused companies is “significant”. Shaftesbury trades on a 2% premium to net asset value with a portfolio valued on a 3.6% equivalent yield, giving the stock an implied yield of 3.5%, compared to London peers Derwent at 5.7% and Great Portland at 5.4%.

“Shaftesbury was the second best performing stock of our UK REITs coverage last year, which is unsurprising given the tumultuous year of political and macro events,” Barclays said.

“We believe Shaftesbury’s unique offering is a relative safe haven and the steadiest of crutches for REIT investors to lean on, but having seen its share price hold up well we see more attractive valuations elsewhere in the sector.”

The bank reduced its target price based on expected slowdown on rental growth due to rising occupancy costs.

There is also a lack of external growth opportunities, Barclays said.

“But in our view, current stock pricing seems to be attributing negative value to external growth opportunities. Looking through the current uncertainty in the London market, we would maintain a strong preference for business models with the optionality of potential development opportunities and external growth.”