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Broker tips: Hargreaves Lansdown, Lloyds, Unilever

By Alexander Bueso

Date: Monday 23 Jul 2018

Broker tips: Hargreaves Lansdown, Lloyds, Unilever

(Sharecast News) - Hargreaves Lansdown was under pressure on Monday as Jefferies downgraded the stock to 'underperform' from 'hold' on valuation grounds, saying the shares currently look overvalued.
"Even including 2019e total forecast dividend of 51.1p we have close to 15% downside from the current share price," Jefferies said.

In a note on asset managers and in light of last week's news that the Financial Conduct Authority is considering banning online investment platforms such as Hargreaves from charging exit fees, the bank pointed out that HL does not benefit greatly from exit fees.

"The point about HL is that in fact very few clients leave and therefore it is safe to assume that a fraction of a percent of revenue is derived from exit fees. On the negative side, we could say that anything that promotes greater switching is negative for HL's rating.

"We have always stated that its premium rating is in part explainable by the fact its clients are highly persistent. But on the positive side HL, given that it actually gains market share, is a beneficiary of industry transfers."

As far as the company's full-year results in August are concerned, Jefferies - which has a 1,650p price target on HL - expects reported pre-tax profit of £293.2m for 2018, up 9.5% year-on-year, and assets under management of £92.6bn.

UK banks are out of favour with investors but it is possible to differentiate between the riskiest, Lloyds Banking Group and Royal Bank of Scotland, whose cautious strategy is paying off, Berenberg analysts said on Monday.

Because of doubts about Brexit, politics and the economy, sentiment towards UK banks has rarely been lower, Berenberg's Peter Richardson said. British banks trade at a discount to their European peers and there is little investor interest.

Banking trends such as revenue growth and loan losses appear stable but they are fragile, especially for consumer credit, Berenberg said.

Consumer default rates have risen for the past five quarters, consumer credit is too cheap and borrowers may struggle to repay as interest rates rise.

Outright failures of Bank of England stress tests are unlikely but Lloyds is under the most pressure whereas RBS will pass the test without management action, Richardson said. RBS has 40p per share of excess capital and trades on a lower multiple than Lloyds and Barclays, while capital return hopes for Lloyds are too high.

"While broad-based respite from the current negative sentiment is unlikely given ever-present political and economic risks, greater differentiation between UK banks is possible," Richardson wrote. "Avoiding cyclically-exposed banks, in particular Lloyds, is essential."

Berenberg maintained its 'sell' rating on Lloyds and 'buy' ratings on RBS and Standard Chartered, whose success in growing low-risk client revenues is overlooked. Richardson kept 'hold' ratings on HSBC and Barclays. Price targets were also unchanged at 60p for Lloyds and 340p for RBS.

Analysts at UBS hiked their target price on shares of Unilever in anticipation of a pick-up in the rate of underlying sales growth at the consumer goods giant in the back half of 2018, while reiterating their recommendation to 'buy'.

The rate of USG would rise from 2.5% over the first six months of the year to 3.9% in the second half, they said, even as operating margins on an EBIT basis improved slightly, thanks to cost savings and product mix.

Together with a favourable tailwind from foreign exchange markets, that would see the group's earnings per share grow three percentage points more quickly in 2018 and 2019, they said.

Share buybacks and management's confidence were also factors, UBS explained in a researh note published on Monday but dated 20 July.

Nevertheless, for fiscal year 2018 as a whole, USG were now seen up by 3.2%, which was down from the 3.5% UBS had been expecting before Unilever reported its first half numbers.

The broker lifted its target for the shares from 4,250p to 4,700p on the back of its now higher estimates for the group's earnings per share and free cash flow, as well as the recent improvement in the sector's valuation on the back of the stabilisation seen in 10-year US Treasury yields.

UBS pegged the company's weighted average cost of capital at 7.6% and the terminal rate of growth used for its discounted cash flow valuation at 2.5%.

Analysts led by Pinar Ergun also noted shareholders' near "universal support" for the company's planned unification, which its chief executive believed would mark "an important next step to unlock the flexibility needed for future portfolio change, including through equity settlement acquisitions or demergers."

That, the broker explained, should see investors increasingly consider using a sum-of-the-parts approach to valuing the shares.

Its own updated SOTP valuation yielded a target price of £52, for 20% upside potential.


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