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The Expert View: Royal Mail, HSBC & Barclays

Our daily round-up of analyst commentary on shares, including St Modwen Property and Paddy Power Betfair.

by Michelle McGagh on Sep 05, 2017 at 05:01

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Key stats
Market capitalisation£3,854m
No. of shares out1,000m
No. of shares floating985m
No. of common shareholdersnot stated
No. of employees158955
Trading volume (10 day avg.)3m
Turnover£9,776m
Profit before tax£272m
Earnings per share27.29p
Cashflow per share58.70p
Cash per share29.90p

Liberum: long-term risks from Royal Mail walkout

Royal Mail (RMG) is at risk of a staff walkout that would make it harder to make productivity improvements and hit the company in the long term, says Liberum.

Analyst Gerald Khoo retained his ‘sell’ recommendation and 385p target on the shares, which weakened 6.6p or 1.7% to 386p on Monday.

He said the danger of strikes had risen after the Communications Workers Union ran an ‘extensive grassroots campaign to build support for industrial action’ to protest changes to the final salary pension scheme.

‘The risks from industrial action lie predominantly in the likely modification of customer behaviour in the longer term, accelerating e-substitution in letters and the loss of market share in parcels,’ said Khoo.

‘We also believe productivity improvements would be harder to deliver against an adversarial backdrop to industrial relations.’

Key stats
Market capitalisation£150,296m
No. of shares out20,100m
No. of shares floating20,026m
No. of common shareholdersnot stated
No. of employees232957
Trading volume (10 day avg.)19m
Turnover32,755m USD
Profit before tax1,003m USD
Earnings per share0.05 USD
Cashflow per share0.21 USD
Cash per share8.60 USD

HSBC a ‘buy’ as bank reverses fortunes, says Jefferies

Jefferies has initiated coverage of HSBC (HSBA) bank, predicting it will generate higher revenues after seven years in the doldrums.

Analyst Joseph Dickerson said the bank was seeing a ‘reversal of fortunes’ as he issued a ‘buy’ recommendation and a price target of 920p on the shares, which dipped 0.4% to close 2.8p lower at 747p yesterday.

‘HSBC has re-engaged in balance sheet growth, which should drive revenues higher after disappointing for seven years,’ he said.

Dickerson predicted higher capital returns next year as a number of headwinds, including disposals, currency movements, and a deferred prosecution agreement in the US, subsided.

‘This balance sheet growth should drive a 3% revenue compound annual growth rate over the next two years. There is further optionality to revenue growth given: 1) HSBC screens as asset sensitive and is therefore geared to rising US dollar rates, and 2) the markets business stands to benefit from any recovery in fixed income as HSBC has been a net share gainer in this segment over the past five years.’

Key stats
Market capitalisation£32,482m
No. of shares out17,035m
No. of shares floating16,969m
No. of common shareholdersnot stated
No. of employees119300
Trading volume (10 day avg.)28m
Turnover£14,541m
Profit before tax£1,562m
Earnings per share9.17p
Cashflow per share20.52p
Cash per share867.01p

Deutsche: ring-fencing will pay off for Barclays

Ring-fencing UK retail customers will be a drain on capital at Barclays (BARC) but this will be outweighed by improving returns at the bank, says Deutsche Bank.

Analyst David Lock reiterated his ‘buy’ recommendation for Barclays and increased his target price for the shares from 229p to 231p. The stock softened a penny to 190p on Monday.

Lock was confident that new US and UK subsidiaries would benefit Barclays, the latter coming in response to new ring-fencing legislation in the UK requiring banks to protect retail savers’ deposits.

All subsidiaries will have to be capitalised independently, which is a cost to the bank but Lock said this ‘down-streaming’ of money is ‘manageable within the group context’. The analyst said the UK subsidiary was the ‘strongest component of the group’ thanks to low [loan] impairments but warned they were ‘likely to rise medium term’.

‘Barclays faces lower profitability in the medium term, unless it targets additional growth,’ he said pointing to Brexit, rising borrowing costs and litigation as the main drags.

Despite these hurdles, Lock said its shares traded too cheaply. ‘Barclays deserves to trade at a discount to Europe, given return on tangible equity which is 1.5-2% lower – but a 40% discount on tangible book is too extreme,’ he said.

Key stats
Market capitalisation£805m
No. of shares out222m
No. of shares floating182m
No. of common shareholdersnot stated
No. of employees345
Trading volume (10 day avg.)m
Turnover£288m
Profit before tax£53m
Earnings per share22.05p
Cashflow per share22.42p
Cash per share1.89p

Numis: new plan to boost dividends at St Modwen

A new strategy at property developer St Modwen (SMP) could lead to increased profits and improved dividends, believes Numis Securities.

Analyst Chris Millington retained his ‘buy’ recommendation and increased his target share price to 487p after the company held a capital markets day in which it outlined a strategy to accelerate development, cut borrowings and shift the income-producing portfolio away from retail and towards industrial and logistics properties.

‘Our analysis shows that this should result in a significant increase in cash-backed profits and return on equity, which in turn should pave the way to a vastly improved dividend policy,’ he said.

‘We think these dynamics will lead to a material narrowing in the group’s net asset value discount and we increase our target price to 487p.’

The shares gained 7p to close 2% up at 361p yesterday.

Peel Hunt backs Paddy Power’s Australian arm

Peel Hunt is positive about the opportunities for Paddy Power Betfair’s (PPB) Australian business Sportbet, which it says can be scaled up.

Analyst Ivor Jones retained his ‘buy’ recommendation and target price of £10 on the stock after a group presentation on Sportsbet.

Jones said while the presentation ‘left us unsure whether management had been fleet of foot or flat-footed in preparing for increased duty costs and competition’ on balance ‘we are optimistic that there is an opportunity for Sportsbet to cut costs, through greater integration with the wider group’.

The integration of Sportsbet with the European business will mean an opportunity to share resources and skills and ‘this will, in turn, allow Sportsbet to make more efficient investment in value, product and brand’, said Jones.

The shares shed 0.4% to €76 on Monday.

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  • Royal Mail PLC (RMG.L)
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  • HSBC Holdings PLC (HSBA.L)
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  • Barclays PLC (BARC.L)
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  • St. Modwen Properties PLC (SMP.L)
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  • Paddy Power Betfair PLC (PPB.L)
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