Market Report: APS-free Lloyds is a winner, says broker
Thursday 24 September 2009
Lloyds Banking Group stood firm last night, as investors bought in after a broker outlined a way ahead without the Government's asset protection scheme (APS).
The stock climbed to 108.9p, up 1.1 per cent or 1.2p, after the Execution analyst Joseph Dickerson issued a "buy" note, arguing that the bank would be better off without the APS, which he said was a "sub-optimal way to recapitalise the sector and should be reconsidered".
He hopes that the group opts for a rights issue instead, suggesting that "banks with substantial government ownership have a higher cost of capital than those that do not". Reduced funding costs would benefit the net interest margin, which in turn would boost earnings, Mr Dickerson explained.
"Lloyds has an opportunity to change this by not participating at all," he said. "£15bn of net (we forecast £16bn including a £1bn termination fee to [the Treasury]) non-Government capital is likely to reduce Lloyds's cost of funding substantially."
For those worried about whether Lloyds could raise the amount required, he added that a "£16bn capital raise is not a big ask because, if [the Treasury] takes up its rights, the amount of capital needed from the market is [around] £9bn". "Post rights, [the Treasury] would be in a strong position to start to place its stake, creating [a] technical uplift in the share price."
Execution was less keen on Royal Bank of Scotland, which ended 1.8 per cent or 0.95p lower at 52.45p. Setting a "sell" rating on the stock, the broker said RBS would "need an estimated £35bn of capital were it not to participate in the APS scheme – nearly impossible to raise in a rights issue".
Overall, the FTSE 100 index, down 3.23 points at 5,139.37, was broadly flat, with traders saying the market was likely to remain range-bound in the absence of fresh economic data. The mid-cap FTSE 250 index was less resilient, easing to 9,217.01, down 31.66 points.
Anthony Grech, market strategist at the City spread-betting firm IG Index, said that while optimism "seems to be pervading the markets for now", it was not clear how long the current run might last. "A number of investors will be sitting on significant gains, given that the [FTSE 100] was languishing around the 4,200 mark as recently as mid-July, and will likely be watching for negative data that could spark a further round of profit-taking," he said.
Liberty International fell back, declining to 507p, down more than 10 per cent or 57p, after raising £280.5m via a share placing at 500p apiece as it seeks to resume investment activity in its regional shopping centres and central London assets. KBC Peel Hunt welcomed the move, upgrading its recommendation to "hold", while Collins Stewart, which stuck to its "sell" stance, said others in the sector may follow suit. "British Land and Land Securities have both in the last week moved toward more front-footed positions with asset sales and debt repayments and may seek additional equity given [the shares] are pricing in positive portfolio value growth for Land Securities of 8 per cent, [for] British Land [of] 29 per cent, [for] Hammerson [of] 8 per cent and [for] Derwent London of 19 per cent," the Collins Stewart analyst Aaron Guy said.
At the close, Land Securities was 9.5p behind at 675p, British Land was 23p weaker at 490p and Hammerson was 15.5p behind at 417.5p. Derwent retreated to 1291p, down 15p.
Elsewhere in the market, the house builders Barratt Developments, up 7.2p at 275.7p, and Redrow, down 6.4p at 227.1p, came to market, with the former looking to raise £720.5m via a rights issue and a placing, and the latter seeking £150m via a rights issue. In response, Panmure Gordon moved Barratt to "hold" from "sell" while keeping Redrow at "sell".
The fundraising fever extended to the media sector, where Yell, the directories group, announced plans to raise at least £500m via a share sale to reduce debts. "This is broadly equivalent to a 1-1 [basis], at a modest discount to the current share price. Allowing for material currency fluctuations, this would lower pro forma net debt to around £3.7bn. Gearing rations would improve under this scenario," Panmure, which is reviewing its stance on the stock, said. At the close, Yell was 13.5 per cent or 10p lighter at 64.35p.
Traders attributed the rush to raise cash in part to the possibility of large capital raisings in the banking sector, which, they speculated, may sap the market's appetite for fundraisings.
Further afield, UBS undermined sentiment around the publicans, moving Marston's, down almost 2 per cent or 2p to 104.5p, Greene King, down 2.6 per cent or 11.6p at 436.3p, Mitchells & Butlers, down almost 5 per cent or 14.4p at 284.2p, and Enterprise Inns, down almost 8 per cent or 11.2p at 132.4p, to "sell".
"Since November 2008, pub shares have experienced both upward estimate revision and multiple expansion," the broker said. "At this stage, unless there is a 'V-shaped' recovery in consumer spending, we believe valuations look vulnerable."
UBS expressed a preference for "neutral" rated JD Wetherspoon, which fared better, closing broadly unchanged at 496.1p, down 0.2p.
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