UBS Warburg believes the company's shares will outperform struggling UK equity markets
HBoS is among the stocks that are receiving the strongest analysts recommendations to outperform in the struggling UK equity markets.
Continuing last week's look at recommendations from analysts, as reported in Investment Week's sister publication Investor's Week, other stocks that are attracting the interest of investment bank analysts are Royal Dutch Shell and BT, both of which are showing positive signs against a weak economic backdrop.
UBS Warburg said that HBoS, rated the sixth largest bank in Europe by market capitalisation, justifies a share price rating at a premium to its sector peers, and predicted that flat costs and above-average revenue growth will deliver a superior earnings performance to match.
Since its formation after the merger of Halifax and Bank of Scotland last year, HBoS is vying to redefine the big four UK clearing banks as the big five over the next few years, UBS Warburg said. Its penetration in a number of key markets, such as unsecured consumer credit, current accounts and small to medium size company lending, should enable the company to build strong customer relationships as it utilises its new-found combination of product expertise, national presence and a strong balance sheet. HBoS looks set to grow revenues at an estimated average 9% in 2002 to 2003 compared to the Eurobank sector average of 6%.
HBoS stands on a forward price earnings premium for 2003 of 7% to its domestic peers and the Eurobank sector. UBS Warburg said mortgage-heavy HBoS would remain attractive relative to its peers, even in a weaker economic climate. It rated HBoS a buy with a 900p target, implying a one-year total return of 12%.
Brokers at SchroderSalomonSmithBarney said the end of year 2001 BAE results were solid, if somewhat dull after a difficult year, but no worse than expected. In 2002, many also of the sector's problems are expected to remain, but the main cause of the difficulties, declining defence budgets, is now set to reverse in the company's main markets. This should bring with it strong performance from the group's core defence activities from 2003 onwards, and makes BAE an attractive core holding to accumulate for long-term outperformance.
Credit Lyonnais said Corus will find it hard to raise prices this year, and has given shares in the firm a fair value of 79p after their near doubling in value since mid-September from 40p. The 11,000 job losses last year will be finalised this year, Credit Lyonnais said, enabling the firm to post lower losses per share this year, of 4.1p versus 11.6p estimated for 2001.
'However a return to profitability in 2003 is contingent upon the economic recovery. Any weakening in sterling against the euro would provide Corus with further leverage in the event of a significant price recovery (in steel),' Credit Lyonnais said. But the brokers add that steel producers will 'struggle to raise prices' this year.
Credit Lyonnais recommends a reduced holding in Northern Rock, despite upgrading 2002 pre-tax profit forecasts for the bank by about 2% to £328m, after the bank posted full year results recently.
The brokers said it 'continues to like Northern Rock with its highly focused, growth-oriented strategy.' But with a trading price at 668p, it is the 'most expensive UK centred bank on 13.1 times prospective 2002 earnings,' the brokers said. 'The good news is in the price and investors should take profits,' said the brokers, who have nevertheless increased their fair value for the bank's shares by 10p to 600p.
Dresdner Kleinwort Wasserstein has a buy tag on Shell at 481p, with a target price 25% above current levels. The brokers said Shell's latest earnings were 'better than they looked,' and making adjustments for special expenditure 'net income would have been $2.05bn, close to consensus.' DWK added that Shell stands at a 10% discount to BP on 2003 price earnings.
'Although offering a lower production growth than BP (3% versus 5.5%), this is balanced by the lower rating and the likelihood of a larger share buy back program,' Dresdner Kleinwort Wasserstein said.
Whitbread is focusing on hotels, restaurants and health clubs and there is clear scope for the company to improve returns throughout the business, Credit Lyonnais said.
Analysts at Credit Lyonnais said that Whitbread shares represent a relatively safe under-valued investment in a company which is in the midst of considerable change.
It added that a 10% increase in earnings per share is achievable and the current rating of the shares still looks backwards to the problems of the past, rather than the benefits from Whitbread's new strategy of improving returns.
Conglomerate Hays is likely to undergo a strategic re-assessment of its shape in the near future. Analysts at GER said shareholder value could be improved if Hays simplified its structure. However there appears to be no simple solution ' it is too small to demerge into two companies of FTSE 100 size.
Hays may consider selling some assets. Mail and logistics are both consolidating industries, and Hays' operations may be worth more to competitors than the stock market is prepared to value them. This would leave a more focussed staffing and BPO group, and would underpin GER's buy rating.
Credit Suisse has reduced its recommendation for Umeco from buy to hold after negative trading statements from Infast and Trifast led to a revisiting of expectations by CSFB.
The brokers noted that sales into the aerospace aftermarket accounted for about 25% of Umeco's sales in 2001. 'In general after-market revenues have declined by 10% to 20% and we expect these levels to be sustained into 2003,' the brokers said. A reduction in forecast sales by CSFB has led the brokers to revise their discounted cash flow valuation to 228p.
'We expect management to take a close look at the cost structure of the business, which may result in some reorganisation costs. In addition, in view of the stock write down policies highlighted in the past week by Trifast and Infast, it would not come as a huge surprise should Umeco follow suit,' CSFB said.
SchroderSalomanSmithBarney said it is less than impressed by the moves so far taken by the management at building supplies outfit RMC. The cost cutting measures are aimed at boosting margins and securing efficiency benefits but SSSB believes that the group will continue to struggle in 2002. The broker said RMC may be asset rich but low returns and high financial risk undermine the investment case.
SSSB outlined the challenges that persist. First trading remains weak in Germany and cement prices are under pressure. Second, the company will also face pressure from the imposition by the government in this country of an aggregates tax. Cost cutting will help but SSSB said that many of the challenges remain on the structural side.
These include excess production capacity, fragmented markets, hostile competitors, lack of balance between ready-mix con-crete needs and aggregate supplies, below average economies of scale and weak finances. SSSB concluded by saying that the group needs to shrink itself substantially; if not a capital injection may well be required at some stage.
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