Broker tips: Legal & General, Barclays, Unilever, Keller, Kier

Legal & General was under the cosh on Friday as Citi cut its 2023 earnings per share estimates and opened a 30-day ‘negative catalyst watch’ on the shares ahead of full-year results on 6 March.

The bank cut its 2023 EPS estimate by around 27%, primarily driven by negative investment variances but said its operating profit estimate also declined, by around 3%.

"There is some follow to the outer years as our EPS estimates decline by circa 10%," it said.

Citi said it expects material EPS downgrades into results "and although this is primarily investment variance driven, this highlights the opacity of Legal & General Capital (LGC) and comes against a backdrop of L&G being the best performing UK life insurer over the past three months and what we see as limited upside capital return surprise potential".

Shore Capital has reiterated a 'buy' recommendation on Barclays after its deal to takeover Tesco Personal Finance for £600.0m, saying that the stock should double from current levels.

Barclays said on Friday that it will acquire the retail banking business of Tesco Bank, getting its hands on £8.3bn of gross unsecured lending balances, including £4.2bn of credit cards and £4.1bn of unsecured personal loans, along with £6.7bn of deposits

The companies also unveiled a 10-year partnership to market and distribute credit cards, unsecured personal loans and deposits using the Tesco brand, as well as explore other opportunities to offer financial services to Tesco customers.

However, Shore Capital said that while the deal valuation looks attractive at 0.6 times book value, Barclays stock currently trades at circa 0.4x book and so investors will "no doubt rightly question" whether this is the best use of capital, with an enhanced buyback potentially preferable.

"That said, it will add incremental scale, income and so profitability to Barclays already strong credit card business, which has seen balances shrink in the UK following the pandemic," said ShoreCap.

Deutsche Bank has kept a 'buy' rating for consumer products group Unilever, saying that while risks remain there is still earnings growth potential within the group after a solid 2023 performance.

The stock rose strongly on Thursday after annual results showed full-year underlying sales grew by 7% in 2023, with underlying operating profit rising 2.6% as underlying operating margins improved 60 basis points to 16.7%.

"Gross margin surprised to the upside as did volume growth and this before the new management have fully mobilised their action plan," Deutsche Bank said. "There remains a high skew between the outperformers and underperformers in the group which could provide some volatility, but we see Unilever progressing towards a steadier compounding performance under the new management's action plan."

The stock, which trades at 17.8 times 2024 earnings, is currently valued at an 11% discount to the weighted average multiple across the global food/household and personal care sector – a discount "which we regard as too high", the bank said.

Analysts at Berenberg initiated coverage on construction groups Keller and Kier on Friday, taking a positive stance on both stocks.

Berenberg started Keller off with a 1,250.0p target price and a 'buy' rating, stating the group was now "refocused and on solid ground".

"After years of the business being increasingly global, in recent years Keller has been reducing its geographic footprint and has focussed on deepening its product set and capabilities – rather than concentrating on adding breadth to the business," said Berenberg.

"By its nature, the company's margins are low – albeit higher than most general contractors – and somewhat volatile at times; however, we think that its North American exposure is a key differentiator, while its cash generation provides it with strategic options and the stock is cheap."

As far as Kier, Berenberg initiated coverage with a 210.0p target price and another 'buy' rating, telling clients that the "heavy lifting" was now done.

The German bank said that after "a troubling few years", what now remains is a core focus on the infrastructure, construction, highways, property and utilities businesses, leaving "a much simpler and more disciplined group".

"The crux of the investment case is that the initial stages of the turnaround have shown promise and cash generation has improved markedly. We estimate that in FY June 2025 the business should deliver adjusted EBIT north of £150.0m and FCF (after interest, capex, exceptionals and so on) just below £100.0m," said the analysts.

"Using average net debt, that would leave the stock trading on 5.3x EBIT with a 16.4% FCF yield – that is, delivering to the existing plan consistently should warrant a material rerating."