Broker tips: Sainsbury's, BBA Aviation, Lloyds
Sainsbury’s third quarter highlights the group’s compelling strategy and differentiation from the other 'Big Four' supermarkets, Societe Generale said on Wednesday.
The company’s like-for-like (LFL) retail sales were down 0.4% over the festive third quarter but by less than the 0.7% forecast, leading the grocer to say that the second half as a whole is likely to be better than the first.
The supermarket, which is continuing to mull a bid for Home Retail after a November offer was rejected, lifted total retail sales 0.8% excluding fuel, as its new simpler pricing strategy of lower regular prices and reduced levels of vouchering and promotional participation helped grow transactions and volumes.
“The group benefitted from a more transparent pricing policy, with fewer promotions/multi-buys and a stronger focus on ‘low’,” said Societe Generale analyst Arnaud Joly.
Societe Generale gave Sainsbury’s a ‘buy’ rating and a target price of 315p.
Citigroup initiated coverage of BBA Aviation at ‘buy’ with a 210p price target, noting the shares have dropped 19% since 1 July 2015.
The bank said the fall provides investors with an attractive entry point, with completion of the Landmark acquisition in early 2016 a primary catalyst.
BBA announced the acquisition of US aircraft services and private jet hire company Landmark for £1.3bn in September.
“Landmark will grow BBA's Signature network by more than 75% in North America and reinforce its market dominance,” it said.
Citi estimates Landmark is 11% accretive to earnings per share and over 20% accretive including cash tax benefits.
The bank noted that BBA trades at 10.5x 2015e pro-forma price-to-earnings, inclusive of cost and tax synergies.
The company is due to report its 2015 results on 3 March and Citi is around 10% below consensus as a result of flat US business jet activity and one-off disruptions in the smaller divisions.
“However, we forecast earnings rebounding in 2016e/2017e as US economic conditions are supportive of a recovery in business jet demand.”
Exane BNP Paribas has downgraded Lloyds Banking Group from ‘neutral’ to ‘underperform’ and reiterated its ‘underperform’ rating for Barclays on a bleak operational outlook for UK banks .
In a note to investors on Wednesday, it said comments from the Department for Business, Innovation & Skills (BIS) and the Bank of England’s Financial Policy Committee (FPC) have led it to soften its view on capital.
That in turn has forced Exane BNP Paribas to expect lower than consensus dividends over the next three years.
On top of that, the investment bank believes the operational outlook for the sector is increasingly bleak.
“We cut 2017 EPS estimates by an average of 4% to reflect slightly lower margin and slightly higher impairment assumptions - driven by a more rapid reduction in releases and recoveries.”
It said Britain’s potential exit from the EU could also push up the sector’s risk premium ahead of the referendum.
Exane BNP Paribas’ concerns about Lloyds Banking Group’s margin and impairment have increased since it last downgraded the stock in September 2015.
“We also think the cost income target of 45% by 2018, set just one year ago, is now unachievable,” the note said.
“Distribution potential is also debatable, and we think the bank will be able to pay just 12p of dividends (or the equivalent in buybacks) over the next three years, well below some market estimates.”
The investment bank also believed Barclays should raise capital given how tight it is operating against end-point requirements.
“Even if this capital was not ultimately needed, we believe it could be used to significantly enhance earnings through a LME on its subordinated debt.”
It said if the bank did this, Exane BNP Paribas’ might look more positively on the stock.
Its target price on Barclays was dropped 14% to 215p, while it dropped the target price of Lloyds 5% to 74p but raised Standard Chartered’s target price 3% to 515.
The note also highlighted that RBS remains the investment bank's only ‘outperform’ rating.