Broker tips: HSBC, Ryanair, Aveva

Barclays left its rating on HSBC at ‘equal weight’ and raised its target price to 600p from 550p after the bank reported its third quarter results.

HSBC on Monday posted a 86% drop in third quarter pre-tax profits to $0.84bn, while revenue fell 37% to $9.5bn, both on a reported basis.

Profits were hit by several exceptional items, including a $1.7bn loss from the disposal of its Brazil bank, $1.0bn of restructuring costs, $1.4bn of negative movements in its own debt as credit spreads tightened and $0.5bn of UK customer redress charges, together with a $658m drag from the strengthening US dollar.

However, the Brazil sale allowed HSBC to complete almost two thirds of a $2.5bn share buyback as well as maintain its ongoing dividend.

The bank's balance sheet was also in better shape, thanks to a change in capital requirements for Chinese bank BoCom, allowing the common equity tier-1 capital ratio to increase by nearly two percentage points to 13.9%.

“A much stronger reported capital position increases our confidence that HSBC will be able to deliver the $3.5bn of share buybacks that we previously estimated for 2017 and also raises the prospect of more than $8bn further capital return in the medium term,” said Barclays.

“Despite a current 13.9% CET1 ratio, this seems dependent on global and regional regulatory requirements being clarified and the ability of HSBC’s regional businesses to throw off excess capital.”

Barclays said the earnings outlook for HSBC remains “less inspiring” as it is cautious on assuming a continuation on the positive third quarter revenue trends seen in the Global Banking and Markets, and Wealth Management businesses. However, continued tight cost control remains a positive, Barclays added.

“Reflecting some improvement in medium-term return on tangible equity and greater confidence in capital return we raise our price target to 600p (from 550p), retaining an equal weight rating.”

Ryanair shares ascended on Tuesday as JP Morgan Cazenove reiterated an ‘overweight’ rating and target price of €15.25, saying the company remains its “top airlines pick”.

The budget airline on Monday reported an 8% increase in second quarter net profit to €912m as sales rose 2% to €2.4bn.

The Irish carrier also initiated another share buyback at €550m, to be carried out through February 2017, in an effort to soothe investors’ worries after the company issued a profit warning last month.

A slump in sterling following the Brexit vote was cited in the company’s warning that profit growth will slow this year to a range of €1.3bn to €1.35bn, compared to a previous estimate of €1.375bn to €1.425bn.

However, Ryanair has signalled confidence in its long-term passenger forecast. It now expects to carry 200 million passengers a year by March 2024, or 20 million more than previously expected by that time.

“Ryanair remains our top airlines pick on the back of growing unit cost leadership, scale, and track record of effective execution,” said JP Morgan.

The bank said the quarterly results were in line with estimates. JP Morgan added that it does not expect material revisions to its fiscal year 2017 net income estimate which sits within the guidance range.

“Longer-term, we see scope for upside to base case estimates in light of faster projected growth and development of additional revenue streams.”

Numis on Tuesday reiterated an ‘add’ rating on Aveva and a target price of 2,050p after the engineering software provider swung to a profit in the first half.

In the six months to the end of September, the group made a pre-tax profit of £5.5m compared to a £800,000 loss the year before, as revenue edged up 3% to £84.3m. Aveva pointed out that in 2015, reported profit was hit by the professional adviser costs associated with the aborted transaction with Schneider Electric.

As far as revenue is concerned, it said the weakening of the pound in the aftermath of the Brexit vote has had a favourable impact.

Aveva lifted its interim dividend by 117% to 13p per share following the board’s decision to re-weight the total dividend more heavily towards the interim dividend than in previous years.

Numis said Aveva’s first half was in line with expectations, helped by cost control and a strong currency tailwind.

“In our view Aveva remains a top quality business with some challenging end markets,” Numis analysts David Toms and Will Wallis said.

“At some point the oil and gas headwinds will abate, revenue growth will return and we think margins could increase back to 33-35% (in line with the decade average) giving 100p+ of earnings per share and we think patient investors could see a 50% + share price rise. However, the timing of this remains impossible to predict.”