Broker tips: HSBC, PZ Cussons, IG Group
Investec downgraded HSBC to ‘hold’ from ‘buy’, pointing to just under 1% residual upside to its unchanged 450p price target.
“Our continuing belief that HSBC can, should and will maintain an (uncovered) 51c dividend, an implied 2016e dividend yield of 7.9% is, by itself, insufficient to sustain a ‘buy’ recommendation,” the brokerage said.
“However, we believe that June could offer a number of potentially positive catalysts (Brazil disposal, Fed/Brexit decisions) which may generate profit-taking opportunities.”
Investec said that in both relative and absolute terms, HSBC has performed resiliently over the past few weeks. It said this may represent an element of anticipation of forthcoming events such as the Brazil disposal due to complete this month and a potential increase in US interest rates, which would be a net positive for the bank.
However, the brokerage said the twin challenges of an ongoing drop in net interest margin and declining customer loans make HSBC’s 10% return on equity target unrealistic.
Investec said it continues to see better value in the challenger bank space generally, and for Aldermore in particular, which it rates at ‘buy’.
PZ Cussons was under the cosh on Friday after Canaccord Genuity cut the stock to ‘hold’ from ‘buy’, keeping the price target at 345p as it recommended taking profits ahead of the full-year update.
The brokerage noted that since the interim results on 26 January, the shares are up 37%, helped by a 57% rise in the oil price and outperforming the FTSE 250 index by 31%.
“We think risk from the scheduled full year trading update on 9th June is no better than equally weighted (with April's update stating that performance ‘overall...has been in line with expectations’), and would take profits in the light of the rerating and the lack of a near-term catalyst.”
Canaccord pointed out that Nigeria, having been as much as 40-45% of group profit three years ago, now accounts for just 25%. It said visibility here remains limited, with further devaluation of the naira possible and Cussons continuing to have to buy dollars at a 50% - or higher - premium to the official rate.
“While the company has been drawing on its 100+ years of experience in Nigeria, enabling it to perform creditably in Home & Personal Care products (through the sale of smaller pack sizes, for example), we see little prospect of a near term rebound in its more economically sensitive electrical white goods business in Nigeria - despite a strong market share performance.”
As a result, the brokerage cut its growth assumptions for the Africa division.
Still, it said Cussons’ performance elsewhere continues to be strong.
IG Group had its target price lifted to 815p from 800p and its ‘sector perform’ rating reiterated by RBC Capital Markets on Friday after the spread-betting operator reported its fourth quarter trading update.
The company on Tuesday said it had performed “well” in the last three months of the fiscal year despite a relatively quiet quarter in financial markets.
IG said it expected to post full year earnings slightly ahead of expectations next month, driven a continued robust performance and ongoing strength in trading revenue.
“Post IG’s pre-close statement on 31 May and incorporating our updated thoughts on the company’s future potential, we increase our forecasts across the board, largely by 2%,” RBC said.
RBC expects full year revenue of £442.1m, compared to £399.4m the previous year. Earnings before interest, tax, depreciation and amortisation (EBITDA) is pencilled in at £216.9m and earnings per share (EPS) at 44.0p, following 2015’s £204.1m and 41.1p respectively.
“IG is a well-run company that is benefiting from market volatility through increased client activity. Further positives include IG’s market leadership in key markets, a 40-year operating history and well-known brand, high profit margins (2016 full year EBITDA margin: 48%), a shareholder-friendly dividend policy (70% pay-out) given strong free cash flow characteristics (high profit margins and cash flow conversion yield healthy levels of operating cash generation; capital expenditures are minimal), an increasingly cash-rich balance sheet, and ongoing growth, as we expect net revenue, pre-tax profit, EBITDA, EPS and the dividend to grow at 7% to 9% compound annual growth rate from fiscal years 2015 to 2018.”
The broker said shares are trading just below their fair value and therefore continues to believe that IG warrants a ‘sector perform’ rating.
RBC added that the volatile market backdrop, coupled with uncertainty around economic growth, interest rates and the UK’s EU referendum, are presenting ideal conditions for IG’s clients to increase their trading activity.
“We therefore believe that the uncertain market backdrop and IG’s dividend yield – at around 4%, while not standout, is safe and increasing – should support the shares at around the current level.”