Broker tips: OneSavings Bank, UK housebuilders, InterContinental Hotels

The company reported underlying profit before tax was up 52% to £105.9m in 2015, and loans and advances grew 31% to £5.1bn.

The FTSE 250 firm's cost to income ratio was further reduced during the calendar year, to 26% from 28%, which the board put down to strong income growth and a focus on cost control and efficiency.

Underlying return on equity increased to 32% from 31%, and underlying basic earnings per share were up 43% to 34.8p from 24.4p. Its fully-loaded Common Equity Tier 1 capital ratio also strengthened, to 11.6% from 11.4%.

“We see OSB as a reassuringly predictable story which delivers extraordinary returns on a consistent basis,” said Investec analyst Ian Gordon.

“As such, it is something of a mystery to us as to why analysts/investors have been so fickle; the stock fell c.40% in four months ahead of today’s numbers!”

Gordon said the second half reported earnings per share (EPS) of 19.1p was 1% below Investec’s “top-of-range” forecast of 19.36p but 22% ahead of Bloomberg consensus of 15.7p.

“As a reminder, we continue to believe that Aldermore (Buy) – our top pick – offers a more transparent, defensive and diversified story which, on a 12 month view is likely to deliver material outperformance against every UK bank in our coverage.

“However, OneSavings has now displaced it as the “cheapest”, trading on just 7.5x 2015e EPS, or, perhaps more remarkably, just 5.5x 2017e.”

HSBC initiated coverage of UK housebuilders saying the sector offers exposure to an area of real undersupply, with the UK government “largely pulling out all the stops to help”.

It started Barratt Developments, Bellway, Berkeley, Bovis Homes, Crest Nicholson, Galliford Try, McCarthy & Stone, Persimmon, Redrow, and Taylor Wimpey all at ‘buy’.

“In simple terms, for a sector that we predict in 2016 will be delivering an average 17% post-tax return on invested capital and a 20% return on equity, it instinctively does not seem right for it to be rated on an average 2016e price-to-earnings ratio of just over 10x with a 5% dividend yield.

“Indeed, by 2018 we estimate that some shares may offer dividend yields as high as 7%.”

HSBC said that in world concerned about oversupplied situations globally, this sector offers the reassurance of the long build-up of an undersupply of UK housing versus new annual household formations.

It expects this situation to persist unless, post a potential Brexit, the UK is unable to come up with sensible working visa arrangements, and the 3 million non-British EU nationals simply become unwelcome and depart en masse.

The bank’s key calls are Bellway for good value, Crest Nicholson for growth with income and Galliford for self-help.

As far as Redrow is concerned, HSBC said it was more positive than most, as the group’s strategy deserves a much higher rating than it is currently being penalised with.

On Bellway and Redrow, it said the current valuations are penalising them for not having as high a dividend payout as the others in the sector and look very overdone given the growth opportunities available.

In addition, HSBC pointed to the UK government’s numerous initiatives to help bridge the gap between supply and demand in the housing government, with Help to Buy being one of the key schemes.

It also highlighted the Starter Homes scheme and the Private Rented Sector initiative, which aims to increase investment by institutional investors in the PRS, where all the properties are built for rent, not sale.

InterContinental Hotels Group was under pressure after Morgan Stanley downgraded its rating on the stock to ‘equalweight’ from ‘overweight’ as the shares approach its 3,050p price target with a more balanced risk-reward.

MS noted the stock has enjoyed a fairly strong performance this year and its 2017 price-to-earnings ratio is now close to its US-listed peer multiples.

Still, it continues to believe the business is attractive.

“We have been long-term supporters of IHG. It has an attractive fee-based asset-light model, a large pipeline, strong free cash flow, and scope to continue to generate double-digit EPS growth,” the bank said.

It pointed out that IHG will pay a $1.5bn special dividend in May – with a share consolidation, so structured as a 16% share buyback – and with continuing strong free cash flow MS estimates that it could retire an additional 40% of its market capitalisation by 2020.

Morgan Stanley said revenue per available room trends were mixed. US RevPAR is up 2.2% year-todate versus 2016 guidance of 2-5% for the listed US hoteliers, and the bank forecasts US RevPAR +4% in 2016.

“However, while we expect an acceleration from here, RevPAR trends disappointed in 2H15, Morgan Stanley economists have been becoming more cautious, and IHG's RevPAR has been underperforming peers.”