Broker tips: Shawbrook, Randgold, GKN, Lloyds

Numis hoisted its earnings forecasts for Shawbrook significantly after the challenger bank delivered strong results and outlined an upbeat outlook.

Shawbrook, while also rejecting a 330p-per-share takeover bid from private equity backer Pollen Street, reported 2016 results that showed profit before tax of £88.2m and earnings per share at 29.8p, putting the shares on a historic p/e rating of 10.5.

Keeping its 'buy' rating, the broker hefted its earnings per share estimate for this year by 16% to 34.7p from its previous 29.8p forecast.

For 2018, EPS is expected to rise to 40p, a 3% increase in the estimate from 38.7p.

"The reason for the gap in the EPS change between the two forecast years is because our previous 2017 estimates had factored in a mild recession in the UK and we now expect GDP growth of circa 2%," said analyst James Hamilton.

As a result, with its shares closing on Tuesday at 314p, Shawbrook was being valued at just 9.2 times 2017 earnings or 8.0x 2018 earnings.

Based on management's pledge for a 30% payout ratio for 2017 and 2018, the bank is forecast to have a 2017 dividend yield of 3.3%, increasing to 3.8% in 2018.

While some investors are concerned about the 20% growth target and the 35% cost-income ratio target, Hamilton believes Shawbrook’s overriding target is a 22-25% return on average equity.

"Given it is already achieving that target, growth isn’t required and we believe Shawbrook would happily restrict growth to maintain returns.

Given Shawbrook’s modest scale, he sees the potential for it to grow even if the UK is heading into a downturn, pointing to Close Brothers' successful passage through the credit crisis and Provident Financial's growth driving a high cost-income lower that enabled its Vanquis arm to move into profit through the crisis.

"With the commodity capital banks having large and very profitable segments to attack we believe the 2020 targets are achievable."

Randgold Resources

Shares in Randgold Resources were on the backfoot after RBC Capital Markets downgraded it to 'underperform' from 'sector perform' and lowered its price target to 5,900p from 6,000p saying it expects a near-term challenge for the price of gold.

RBC expects Randgold to underperform its peers and the lower target price was largely on higher capital expenditure in the 2017 financial year and implies 17% downside using the broker’s $1,300 per ounce of gold forecast.

It said that on a spot net present value basis, Randgold and the European gold industry in general, has moved back to Brexit-like levels with the miner trading at 1.9 times the spot net present value, the top of its 12-month range after a quarter that is not expected to be repeated in the near-term.

A near-term challenge for gold is expected with the recent resurgence in real interest rates suggesting that there could be more short-term headwinds.

RBC said that Randgold has created the most value in the gold industry over the past decade, but there is difficulty in seeing what drives the miner to the next level.

“Sofia-Massawa appears to be the next growth project; however, this will likely only serve to replace Tongon production in what is a hybrid/refractory project that doesn't yet meet the 20% initial rate of return threshold for investment.”

It believes there is long-term value potential in the Democratic Republic of Congo and Cote D'Ivoire, but this could be additive over the medium-term and does not compensate for the current valuation, as RBC adds $500m to its net asset value for the intangible value.

The broker also took aim at the $516.0 of cash sitting on the gold digger's balance sheet, which equated to 1/8th of its total shareholders' equity and was returning less than 1%, weighing on its return on equity.

GKN

Analysts at HSBC hiked their target price on shares of GKN saying the company was set to benefit from the paradigm shift towards electric cars and hybrid platforms.

The so-called eDrive segment already generates about 50.0m pounds of sales a year and management expected the tally to rise to roughly 200.0m by 2020.

HSBC also hailed the decision to sell Stromag, adding that concrete restructuring initiatives and a focus on acquistions would result in better earnings quality.

"If management continues to ‘tidy-up’ its Other Businesses and utilises its strong balance sheet we estimate that it has cGBP2.5bn to fund acquisition targets."

To all of those plusses one could add GKN's investments in R&D, the broker said.

On the matter of the company's pension deficit, which was last at 2.0bn pounds, HSBC said the IAS 19 accounting norm "materially" overstated the firm's liabilities.

The situation was manageable given how pension funding was at approximately five to six per cent of EBITDA in 2015 and 2016, HSBC said.

Improved Gilt curves could also help. A 100 basis point increase in the discount rate used to estimate its liabilities reduced them by 535m pounds.

From a valuation perspective, stock in GKN was changing hands at a 44% discount to UK engineers in terms of its 12-month forward price-to-earnings multiple.

Analyst Scott Cagehin revised his target price on GKN's shares from 395.0p to 445.0p while reiterating his recommendation to 'Buy'.

Lloyds

Analysts at Deutsche Bank nudged their target price for Lloyds higher but said they struggled to see the lender's risk-adjusted margins improving from here as long as interest rates remain low.

Indeed, absent a sustained and steady normalisation of interest rates, margins were expected to fall.

Furthermore, the first one or two increases in Bank Rate would have a limited impact, they argued.

"Just as banks were asked to pass on rate cuts to mortgages in 2016 we expect similar treatment for savers when rates start rising, and LBG has a lower mix of current accounts than peers," analyst David Lock said.

Loan loss provisions were also at record lows, implying 'downside'.

The 'bull case' for Lloyds, on the other hand, was that if its target for RoTE could be achieved - which implied Bank Rate at between 0.75% to 1.0% - that would equate to roughly 250 basis points of additional capital generation each year and a 8.0% dividend yield on a 75.0% payout, or 11.0% on 100.0%.

From a valuation perspective, a cash dividend yield between 6% and 7% was attractive for investors, Lock said, and better than HSBC and other UK banks.

However, changing hands on 1.2 times tangible net asset value and a 2018 price-to-earnings multiple of 10.2, "it is not especially cheap," so 'hold', Lock said.