Broker tips: HSBC, Cairn Energy, Taylor Wimpey

Far from setting out a bold revamp of its strategy, HSBC is bent on ‘defending the Empire’, which may lead to its loss, a leading broker said.

The lender’s investor update published on 9 June revealed how management continues to underestimate the negatives of running a complex global universal banking business model given the new regulatory and operating environment analysts at Macquarie wrote in a research note dated 9 June.

Given the reduction in risk weighted assets which it announced, HSBC is still too optimistic on its ability to generate revenues.
Hence, in the medium-term the broker still sees a risk of a dividend cut – which could push HSBC towards a break-up.

Yes, the bank will sell businesses or exit from Turkey and Brazil but the “root problems” of sub-scale and underperforming markets and businesses continued to be unaddressed.

Indeed, “assuming no radical strategic change”, the dividend pay-out is significantly at risk, Macquarie maintained.

“A break-up of HSBC – or more radical restructuring – would generate substantial shareholder value in our view and it is a mid-term risk to our Underperform call,” it added."HSBC will remain a sub-10% ROE business."

Macquarie kept its underperform recommendation and 5,200p target price on the shares unchanged.

Citigroup upgraded Cairn Energy to ‘buy’ from ‘neutral’ and raised the price target to 250p from 207p.

It said the company’s resource potential offshore Senegal is under-appreciated, while the stock’s valuation looks attractive.
“We believe Cairn’s emerging resource position offshore Senegal can be developed at break-even economics of less than $40 a barrel,” said Citi.

In addition, it said the shares discount little value for Cairn’s remaining 9.8% stake in Cairn India, which could be a source of further upside if it wins its international arbitration case.

“The new S$575m debt facility and sale of a 10% stake in the Catcher project provides Cairn with sufficient liquidity to fund its share of ongoing UK developments (Catcher and Kraken) and planned 2-year Senegal drilling programme,” noted Citi.

Based on the bank’s conservative start-up assumption of 3Q 2017 for both the Kraken and Catcher projects, it forecasts Cairn with cash of $103m at the end of 2017.

Citigroup downgraded Taylor Wimpey to ‘sell’ from ‘neutral’ on valuation grounds following a very strong run in the share price, as it raised the target price to 170p from 160p to reflect changes made to its valuation methodology.

It noted that the share price is up 39% year-to-date and around 70% over the last 12 months.

Still, Citi said fundamentals are robust, with the balance sheet in good shape and the group now almost purely focused on UK housing.

“It is doing a good job repositioning its strategy to support its capital return programme with a ‘soft’ cap on volumes and is also building its strategic land bank. It has made very good progress on its medium-term financial targets,” said the bank.

Citigroup expects the group to report pre-tax profit of £582m in 2015 and grow its net asset value by around 6%.