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Expert View Special: can Lloyds continue to deliver?
by Chris Marshall on Sep 18, 2013 at 05:01
The government's £3.2 billion share sale in Lloyds prompts analysts and fund managers to debate what the bank is worth.
In a special edition of our daily round-up of analyst recommendations and commentary we focus on Lloyds Banking Group after the government announced it had sold 6% of the bank for £3.2 billion.
A slight majority of City analysts say Lloyds shares are still worth buying.
Shore Capital’s Gary Greenwood reckons an 82p share price would represent fair value, with the strengthening UK economy potentially pushing that price higher. What’s more, a dividend could be paid in 2013, he added.
‘Shore Capital believes that Lloyds' shares remain an attractive investment despite their strong rally over the past year,’ the analyst said after the stake sale announcement.
Analysts at Killik made the same argument: ‘Although Lloyds has been a strong performer, we believe this is the first step to normalisation for the company, and remain buyers of Lloyds for its strong exposure to a recovering UK economy.’
Ed Salvesen of Brewin Dolphin investment management added that the government’s pledge not to sell more shares for 90 days – after which retail investors are expected to be offered stock – would reduce volatility.
‘The reduction of the Government holding improves the investment case and the clarity regarding the lock up period should reduce future volatility,’ he commented.
More fundamentally, Schroders fund manager Jessica Ground explained, Lloyds' management was 'doing a good job of improving margins, cutting costs and selling down non-core assets, which should drive earnings into the medium term'.
Or is it too late?
But for every analyst saying investors should buy the shares, there are almost as many saying they shouldn’t (a total of 16 analysts rate the shares a ‘buy’ or ‘strong buy’; nine say hold; six say it’s a ‘sell’ or ‘strong sell’).
Espirito Santo’s Shailesh Raikundlia says sell: ‘While the improving margin guidance provided at the interim results has led to upgrades, we believe that at 2013E P/TBV of 1.4x for RoTE of 7.5%, the valuation is already more than discounting the prospects of mid-teen returns that will not materialise at the group level over the next few years.’
Investec’s Ian Gordon praised the government’s ‘impeccable’ timing, suggesting the government could even manage to sell the entire taxpayer stake before the 2015 general election. He also said Lloyds’ tail-risks had diminished.
But Lloyds remains too expensive for Gordon: ‘From a Lloyds perspective, our view is that little has changed as a direct consequence of this transaction.’
More government help
The stake sold by the government was smaller than many City pundits expected. The ‘focus has instead been on making sure the sell-down of the first tranche can be deemed a success,’ commented Citigroup analysts Andrew Coombs and Ronit Ghose who have a neutral rating on the shares.
But Ralph Brook-Fox, manager of the Ignis Balanced Growth fund (in which Lloyds is a top ten holding) says the smaller stake size ‘strikes the right balance between getting the process underway with the removal of an immediate overhang, whilst at the same time seeking to maximise overall value for the taxpayer by waiting for potentially supportive news flow for further disposals’.
Brook-Fox is looking to an improving British economy for further gains from domestically focused Lloyds: ‘The macro environment in part helped by anticipation of the full implementation of ‘help to buy’ could also bode well for future performance – the extension of government schemes to existing properties should boost transactions and have an important second order effect by improving liquidity and enabling a broader cross-section of people to move up the housing ladder.’
RBS a better bet?
The 6% stake sale is ‘unequivocally positive’ – not just for Lloyds but also RBS, say analysts at Jefferies.
‘We believe such a sale is an important step towards triggering a fundamental and virtuous circle for each name,’ they say.
‘The simple manner in which the shares were placed will no doubt be welcomed by investors. We can only hope that the rest of the government's stake in LLOY and RBS is disposed of in such an effective manner.’
RBS shares are trading at 12% below the price at which the government is likely to start selling, they reckon. ‘We see more optionality in RBS, which is only 12% below the government's carrying value in the name and could see a similar lift as LLOY in the coming months.’
RBS shares, up 31% over the past 12 months, haven’t seen anything like the same lift as Lloyds (up 93% over the past year).