Broker tips: HSBC, RyanAir, Prudential

Jefferies upgraded HSBC on Thursday to ‘buy’ from ‘hold’ and hiked the price target to 770p from 574p as it said the bank was positively-geared to a re-opening in China.

"We believe the China/HK re-opening and capital return prospects of HSBC are underappreciated attributes which create positive return/risk asymmetry and move us to buy on the name," Jefferies said.

Jefferies pointed out that 37% of loans and 36% of pre-tax profit are attributed to China & HK and said it expects a re-opened economy to drive higher loan demand and general activity, which should benefit HSBC.

"HK and mainland China have modestly higher net interest margins for the group, so a pick-up in loan growth in these regions should be accretive to the group," it said.

Jefferies also said it now estimates that the sale of the bank's Canada business can unlock $14bn of buybacks and special dividends across 2023 and 2024 and sees credible re-rating potential given estimated 13% return on tangible equity in 2024 against 0.8x TBV today.

"HK and mainland China have modestly higher net interest margins for the group, so a pick-up in loan growth in these regions should be accretive to the group," it said.

Jefferies also said it now estimates that the sale of the bank's Canada business can unlock $14bn of buybacks and special dividends across 2023 and 2024 and sees credible re-rating potential given estimated 13% return on tangible equity in 2024 against 0.8x TBV today.

"These strengths have allowed Ryanair to improve its strategic positioning as a result of the pandemic, and a likely recession may offer another opportunity to gain at the expense of weaker competitors."

Liberum upgraded Ryanair on Thursday to ‘buy’ from ‘hold’ and upped the price target to €16 from €13 after the budget airline lifted its profit guidance.

After the close of markets on Wednesday, Ryanair bumped up its profit guidance to between €1.325bn and €1.425bn from previous guidance of between €1bn and €1.2bn following better-than-expected demand over Christmas.

"Strong pent-up travel demand over the holiday season for the first time in 3 years, with no adverse impact from Covid or the war in Ukraine, stimulated stronger than expected peak Christmas/New Year traffic and fares," the airline said.

Liberum said it has raised its forecasts to reflect the new current year guidance, resulting in a 24% increase at the EPS level for March 2023E. The broker has also raised its 2024E and 2025E forecasts, reflecting the higher base from 2023E and updated fuel and FX assumptions.

"We still view Ryanair as a long-term winner in the European airline industry," it said.

"We see this as underpinned by its market leadership in European short haul, low unit costs, robust exploitation of its bargaining power wherever possible, pan-European network footprint and strong balance sheet.

"These strengths have allowed Ryanair to improve its strategic positioning as a result of the pandemic, and a likely recession may offer another opportunity to gain at the expense of weaker competitors."

Exane downgraded Prudential on Thursday to ‘underperform’ from ‘neutral’ as it said the investment case is about "jam tomorrow, not jam today".

Investors should reward this through a lower yield, Exane said. It noted that the capital generation from the in-force book has been growing at around 8% a year and said it thinks there’s approximately $4bn of capacity for M&A.

"But this is not, in our view, sufficient to justify the low yield implied by the current valuation," Exane said.

"After a strong run in the past few months, and utilising a new valuation approach focused on distribution capacity…we downgrade to underperform."