HSBC Global Research holds Tullett Prebon as 'Buy', lifts target price to 440p

HSBC Global Research has maintained its 'Buy' rating on Tullett Prebon and hiked it price target on the stock to 440p, from 400, citing good momentum and dividend yield.

HSBC also raised its earnings per share estimate for FY 2016 to 20.08p, from 19.48p, and for FY 2017 to 37.1p, from 34.46p.

"Furthermore, the (Tullett) shares offer a good yield of 4.7%."

HSBC saw the next potential catalyst for Tullett as the closing of the pending IGBB (ICAP's global broking business) deal in the fourth quarter of 2016, which could be announced in September or October 2016.

"While we have optimistic forecasts, we believe the shares are undervalued as consensus seems to ignore merger benefits, and we rate the stock 'Buy' due to convincing upside of 22%," it said.

It linked its hike in target price to an equity-value model based on 2018 estimates for the merged entity, forecasting a 13.4% return on equity.

Against this backcloth, the brokerage cut its growth-rate assumptions for interest rate derivatives from -4% to -6%.

"We believe that this is more than offset by better growth outlook for revenues from Energy & Commodities as well as Equities and Information Sales," HSBC said.

It forecast 3% underlying revenue growth in 2017 and 4% in 2018, along with declining costs.

"First of all, the broker compensation can be reduced by several measures and we decided to reduce our estimate for broker compensation by 0.5% for all years.

"Secondly, in terms of other costs, we now expect 34.2% (versus 34.5% previously) because the new Belfast IT center will result in up-scaling of Tullet’s IT capabilities."