Broker tips: Standard Chartered, Balfour Beatty, Savills

HSBC said Standard Chartered’s share price has responded positively to the weaker pound against the dollar following Brexit as the company’s revenues are dollar-dominated.

Shares have gained 17% since the EU referendum result on 24 June compared to a 9% rise for the Euro Stoxx Bank index.

“There could be some further upside from GBP depreciation: the UK currency may need to adjust further to maintain the capital inflows necessary to fund the current account deficit. But at some point fundamentals will re-assert themselves, and the message from second quarter results is not encouraging,” HSBC said.

HSBC added that it seems increasingly likely that the group will not achieve its target of an 8% return on equity (ROE) by 2018 unless revenues rebound about $3bn. HSBC expects an ROE of 6% in 2018.

The bank said slower economic growth in Asian economies and the deferral of US interest rate increases are part to blame. In addition the de-risking of the group has proved “more damaging to revenues than envisaged by management”, HSBC said.

“The key upside risk relates to the exchange rate. Continued depreciation of GBP relative to the USD would raise the value of the group’s dollar-denominated earnings for UK investors.

“The main downside risk is systemic credit issues in HongKong and China initiated by rising US rates.”

Numis raised its rating on Balfour Beatty to ‘buy’ from ‘add’ and reiterated its target price of 294p on Wednesday after the company reported its half year results.

Balfour reported a pre-tax loss of £21m, down from £150m the same time a year ago, on revenue of £4.1bn, down from £4.2bn.

The order book was up 7% at constant exchange rates to £12.4bn and the company reinstated it dividend with a 0.9p per share payment in a sign that the turnaround plan under boss Leo Quinn is bearing fruit.

“There are a number of key positives in the interim results out today - strong cash performance (enhanced from 2017 onwards by the new deficit payment plan), while Investments and Services (ex-UK Construction) are performing as expected and Services is back into profit,” said Numis.

“Construction UK (CSUK) H1 losses should enable completion of the majority of legacy issue by end 2016, but we believe it prudent to assume it will not fully offset H1 loss in full year numbers. However, this needs to be put in context - we expect CSUK to move into profit in H2 2016 and continue to expect 2017 and 2018 recovery in line with previous expectations.”

As a result Numis said it believes Balfour is at a turning point, especially given the reinstatement of an interim dividend.

The broker added: “We retain the view that the move toward 'industry standard' margins by 2018, together with the underpinning (and potentially increasing) of value in Investments, provides significant upside on a short and medium term basis.”

Savills got a boost on Wednesday as Citigroup upgraded the stock to ‘buy’ from ‘neutral’ following solid first-half results.

“We were reassured by this resilient performance which served to remind us as to the true portfolio within the group with limited reliance on any one geography or business stream,” Citi said.

The bank said real estate as an asset class is likely to remain attractive, given the ongoing search for yield.

“Savills, as a facilitator of capital flows into this asset class, operating on a global scale, with a significant proportion of non-transactional related revenues (around 55% of group revenues), remains well placed in our view.”

Citi pointed out that Savills shares have de-rated by around 20% year-to-date and now trade at an attractive 2017 price-to-earnings of 10.6x, supported by a 4% dividend yield.

It said that given the share price underperformance, its unchanged target price of 815p now implies total potential return of 18%.

“We retain the view that Savills is an extremely well managed operation with true global reach underpinned by a significant proportion of non-transactional revenues.”