Broker tips: HSBC, British Land, Crest Nicholson

Shore Capital reiterated its only 'buy' rating in the housebuilding sector on Crest Nicholson as the company released a half-year trading update.

The broker said Crest, the most "strategically ambitious" of the larger housebuilders due to its growing focus on the institutional private rented sector (PRS), was steaming towards it revenue target of £1bn by October and unit sales of 4,000 by the 2019 year end.

"In the nearer term revenue growth continues to be driven by the substantial increase in average selling price as the repositioning of location and price point of units sold is pushed ahead."

Unit sales rose by 7%, while the average selling price jumped 24% to £387,000 as the company deliberately slowed the sales rate, as sites had been selling too fast, to 0.87 per site per week, which is what would be expected for a South East biased business.

Forward sales were up 24%, though this was boosted by the institutional PRS sales now running at £85m versus £36m a year ago.

"This remain one of the key attractions to Crest, that it is aligning itself to this growing market segment in a way the other larger house builders remain unwilling to accept as necessary," wrote analyst Robin Hardy, who forecasts £197m PBT for the full year and estimates fair value for the shares of 607p.

"We like the desire to grow the business into a visibly under-supplied market where the opportunity to grow more aggressively is transparent yet most of the peer group still prefer to drift towards a cruise mode."

Hardy praised management's happiness to consume capital and hold a moderate geared position and possibly the most generous dividend in the sector.

"While the external pressures and risk on the new build market and sector remain and will keep the overall ratings for the house builders at low levels, and our view of the sector remains cautious, the argument that there is relative value in the sector’s midcaps versus the larger stocks remains."

He advocates switching out of or taking profits from larger house builders, to which Crest stands on a 15-20% price-to-earnings discount despite its higher rate of expected growth.

Numis reiterated an ‘add’ rating and target price of 770p for British Land after the company reported its full year results.

British Land said underlying profits rose to £363m from £313m driven by successful leasing activity and lower financing costs, while net asset value (NAV) jumped to 919p from 829p.

“We remain confident in the underlying strength of the business despite continued global macro uncertainty and the potentially adverse impact of a vote for the UK to leave the European Union,” the group said.

Numis said NAV missed its estimates of 927p but earnings per share of 34.1p beat its forecasts of 32.9p and the dividend of 28.4p per share was in line. Management has guided to a full year dividend of 29.2p in 2017, the broker hightlighted.

British Land expects occupational take-up and investment demand to slow further in the short term ahead of the 23 June EU referendum but for London’s global position to endure in the longer term.

“Interestingly, British Land commented that, since the start of the year, ‘consumer confidence has fallen and retail sales have dipped…likely reflecting concerns about the impending EU referendum and wider global economic and political uncertainty’,” Numis noted.

HSBC had shown it had a tight grip on costs over the last two quarters and with management as focused as ever on risks the dividend was sustainable, Berenberg said.

As risks continued to be re-priced, the lender’s focus on risk should become more appreciated, with the dividend yield providing support as the year progressed.

“If HSBC was viewed as a corporate bond fund it would be trading at an 18% discount to par value, while paying an 8% coupon.

“[…] This is the ideal territory where we want to buy a bank with the opportunity for the bank to trade back to par ie TBV while getting paid an 8% yield waiting for it to happen. This promises a circa 40% two-year return, assuming the re-rating back to par takes 24 months,” analyst James Chappell said in a research note sent to clients and dated 13 May.

Dividends or share buy-backs?

The analyst expected HSBC would report a common equity tier 1 capital ratio of 12.9% at the end of 2016, near the top end of its 12% to 13% target range.

There was only one scenario under which a dividend cut would make sense, if it was used for share buybacks instead.

That would keep the capital return to shareholders constant, reduce the scrip dividend dilution and cut the dividend pay-out ratio to 50% on a per share basis.

Such a move would be 5% accretive to earnings per share and tangible book value in 2018.

It would also boost the bank’s CET1 ratio to 13.8%.

In the same note Berenberg also cut its earnings estimates for 2017-2018 to reflect a higher tax rate in the UK, which was now seen at 25% versus 21% before.

Chappell reiterated his ‘buy’ recommendation and 600p target price.