Broker tips: Lloyds Bank, IMI, Fever-Tree, InterContinental Hotels

Lloyds Banking Group's capital and dividend strength is a “key attraction” for investors, said broker RBC Capital Markets after the bank brightened the sector with full year pre-tax profits of £4bn.

Lloyds declared a 1.7p a share final dividend with a 0.5p a share payout special equivalent to an annual yield for the year at 4.6%, in line with consensus, RBC said in a note.

The bank's capital ratio was13.8%, higher than the 13% target anticipating the 80 basis points (bps) capital cost of buying credit card outfit MBNA, and higher than RBC's 13.4%.

Impairments fell 16% year-on-year, 4% better than consensus with an asset quality review (AQR) at 15bps.

“Lloyds guides to 25bps AQR ratio in 2017 which is much better than consensus at 33bps- the 8bps difference is worth around 5% on consensus profits before tax,” RBC said.

IMI

Liberum has begun coverage of engineer IMI with a 'buy' rating as it sees an improvement in costs leading to earnings forecasts standing 15% ahead of the analyst consensus.

The broker said that two-thirds of the Precision division's margin decline has been due to selling and administrative expenses, which it believes will normalise this year, which would be enough to meet 2018 consensus’ margin estimate.

Based on peer group analysis, analysts suggest the high-margin aftermarket for the Critical division “may have stabilised” and so an order recovery in the first half of 2017 would drive 8% EBIT upgrades in the unit and 2% for group earnings per share.

A forecast of £0.3bn for earnings before interest, tax, depreciation and amortisation for 2016 remains flat for 2017 before rising to £0.4m for 2018.

“Our 2018 EBIT is 15% ahead of consensus, due to our detailed cost analysis and our 4-5% early-cycle organic growth vs 2-3% consensus, driven by our early cycle indicator,” analysts wrote in a note on Wednesday.

This means the enterprise value is 12.7 2018 EBIT, an 8% sector discount versus a 10% premium on consensus.

Maintaining that premium generates Liberum´s target price of 1,460p that offers around 20% upside on the last close.

Fever-Tree

Fever-Tree got a boost as RBC Capital Markets initiated coverage of the stock at ‘outperform’ with a 1,700p price target, saying the long-term trajectory is robust.

“Premiumisation of spirits, market share gains of premium mixers versus mainstream and strong execution will be instrumental to delivering double-digit growth for the foreseeable future, whereas the impact of sugar tax and Brexit should be highly manageable,” the brokerage said.

In addition to the company being well positioned for growth in its established markets, RBC highlighted plenty of opportunities and white space in what Fever-Tree classifies as Rest of the World, which currently makes up only 5% of the group's sales.

As far as the UK sugar tax is concerned, it said this was not a major concern, with only about 29% of the company’s sales falling under the tax.

“Given the premium nature of the brand we think the company is in a good position to pass this on to the consumer if needed.”

Meanwhile, in terms of Brexit, RBC said the company’s asset-light model gives it the flexibility to easily outsource its production to continental Europe in case of a ‘hard Brexit’ with trade tariffs.

InterContinental Hotels Group

Barclays cut its rating of Holiday Inn owner, InterContinental Hotels Group to ‘equal weight’ from ‘overweight’ and left its price target unchanged at 4,000p in light of recent US business confidence data.

The bank said that IHG has one of the strongest earnings per share compound annual growth rate in its coverage universe at 14% with the highest return on capital employed at 57%.

IHG´s multiples are sensitive to US revenue per available room, which for now it feels are supportive in light of recent US business confidence data

Barclays said this justifies the current 20.2 times 2017 estimated price earnings ratio and 13.1 times enterprise value of earnings before interest, tax, depreciation and amortisation (EBITDA) multiples.

Barclays considers IHG’s shares to be “up with events” and sees limited catalysts in the short-term to drive the shares much higher with the 2017 cash return announced and 2016 earnings per share beat now realised.

“Our revised upside case of 4,750p (verses 4,596p) offers 22% upside potential, however under a scenario where revenue per available room trends accelerate (lead indicators continue to be supportive), margins can continue to grow by circa 120 basis points per year (management seems comfortable with this), leverage is retained at 2.5 times (management is comfortable in a ‘normal’ environment) and the company benefits from US tax reform.”