Broker tips: ABF, HSBC, UK equities

Analysts Charlie Mills, Alan Erskine, Molly Eggleton and Faham Baig highlighted upwardly-revised guidance from the ingredients producer from a forecast for full-year earnings to post a "modest decline" to a "marginal decline" now.

That led Mills and his team to raise their target price, derived from a blend of using the adjusted-present-value and and sum-of-the-parts valuation methods, from 3250p to 3450p. The analysts said trading had edged past their forecasts in Sugar, Primark and Ingredients. "After several years of downgrades the group looks to be turning a corner?," they asked.

Like-for-like sales at its Primark unit were back to flat for the first 24 weeks, they estimated, versus a decline of 0.5% over the first 16 weeks. Margins also "looked better" at down by 110 basis points on their calculations.

Good 'spot' prices in sugar would feed-through into profits in China and Spain. The turnaround seen over the last two years in the profitability of its ingredients arm was also continuing, the Swiss broker told clients in a research note.

"All-in-all, an encouraging update from ABF with H1 operating profits modestly ahead of last year, which is a touch better than we initially had."

HSBC delivered a reasonable performance on costs in the last quarter of the year, but the weaker outlook for revenues led Investec's Ian Gordon to tell clients he hoped "fresh cost reduction initiatives" would go beyond existing targets.

Underlying costs for the last quarter of 2015 of $10bn were 1% better than consensus, but the weaker prospects for revenues meant the lender would not meet its target for returns on equity of above 10% by 2018 without fresh cost-cutting measures, the analyst explained.

HSBC reported pre-tax profit of $18.9bn for the year to 31 December 2015, up from $18.7bn in 2014 but below forecasts of $21.8bn.

Adjusted revenue rose 1% to $57.8bn from $57.2bn in 2014, with growth in Global Banking & Markets, Commercial Banking and Principal Retail Banking and Wealth Management.

However, fourth quarter revenues missed analysts' forecasts by $1.1bn; with a "reasonably resilient" performance in GB&M offset by softer retail revenues, particularly in Asia.

HSBC also booked $0.8bn more in provisions in the last three months of 2015, driven mainly by oil and gas and commodities-related exposures.

Gordon added: "The $1.5bn UK bank levy charged in Q4 2015 offers a reminder of why we believe HSBC was mistaken in its decision last week to retain its UK domicile."

On a more positive note, HSBC did raise its so-called common equity Tier 1 capital ratio from 11.8% in the third quarter to 11.9% in the fourth quarter.

It also raised its dividend payout for the last quarter of the year to 21 cents, giving it an actual yield of 7.9%, the analyst concluded.

Investec stuck to its 'buy' recommendation on shares of HSBC but placed its target price under review.

JPMorgan Cazenove upgraded UK equities to ‘overweight’, having held an ‘underweight’ stance on the region for three years, as it said the risk/reward has improved.

The bank noted UK equities are now trading at an outright attractive price-to-book ratio given a 30% underperformance since 2012, with earnings per share revisions improving.

In addition, it argued the UK is a high-yield, liquid market that usually performs well in a challenging global backdrop and in a falling bond yield regime.

JPM said that while high commodity exposure was a drag on the UK over the past five years, commodities’ weight has more than halved.

“We are unexcited by commodities, but believe that in 2016, commodities will not be a major source of underperformance anymore. Investors are still underweight the space, and we believe that one should be reducing shorts during the course of this year.”

The bank also said the recent rollover in the trade-weighted GBP to two-year lows is a help, as the FTSE 100 derives 72% of its revenues from abroad.

As far as ‘Brexit’ is concerned, JPM’s base case is that the UK stays in Europe, although it said this was likely to be a close call.

"In the event of the UK leaving, the initial knee-jerk impact on the market could be quite negative, but we believe the resulting GBP weakness and BoE action will cushion a chunk of the fall in equities,” it said.

The bank recommended hedging this risk by being ‘overweight’ exporters versus domestic, and FTSE 100 versus FTSE 250.

In terms of what to buy, JPM highlighted three main areas of interest: exporters, defensive yield plays such as utilities, telecoms and real estate, and domestic plays such as housebuilders and retail.

JPMorgan funded the move to OW the UK by cutting its stance on Japanese equities to ‘neutral’ saying earnings momentum is slowing down and if yen strength persists, Japanese EPS growth will be negative this year.