JP Morgan sees Barclays's shares closing valuation discount

Analysts at JP Morgan Cazenove reiterated their 'overweight' stance and 250p target price for shares of Barclays following activist shareholder Sherbourne's disclosure of a 5.2% stake in the outfit and a meeting with its finance chief, Tushar Morzaria.

Above all, they said they were comfortable that management's targets were aligned with the overriding aim of shareholders' - to close the shares' discount to their tangible net asset value.

"We came away constructive on our investment thesis which projects an improvement in ROTE to 9.8% 2020E driven primarily through growth, self-help measures (including legacy debt refinancing and cost cuts) and an increasing focus on capital return," analysts Raul Sinha, Sheel Shah and Kian Abouhossein said in a research note sent to clients.

They further pointed out that "significant" changes to the group's strategy were unlikely at this stage.

For starters, after many years of restructuring, the CT1 capital buffer was now higher than that required by regulators and the drag on earnings from non-core assets had receded.

Thus, any "major" change in the lender's strategic aims would restart the restructuring cycle, the analysts said.

On top of that, the fact that Lloyds - the proxy for a UK business with a high return on tangible equity - was trading on just 8.3 times' analysts' 2019 estimates for profits "creates an unhelpful pushback to the sum of parts argument," they argued.

In particular, JP Morgan chose to highlight how "50% of the 2018-20E LTIP is driven by ROTE with max. vesting at 10.25%."

Commenting on the assumptions underlying their sum-of-the-parts-based target price, JP Morgan said Barclays's UK earnings had been valued at a price-to-earnings multiple of 10, with a P/E multiple of 8.0 applied to its Commercial and Investment Bank and a multiple of 9.0 to its Consumer, Cards and Payments unit.

Yet as an aside, on the same day analysts at Citi were out reiterating their 'sell' recommendation and 150p target on Barclays, following a meeting of their own, but with chief Jes Staley.