Broker tips: Jupiter Fund Management, Equiniti, Metro Bank

UBS downgraded investment manager Jupiter Fund Management from 'neutral' to 'sell' on Thursday, citing the group's strong share price performance over the past month and a change in portfolio manager at two key European equity funds as its reasons.

UBS expects the management change to the two equity funds, which make up a combined total of £7.7bn worth of assets under management, will drive outflows over the coming year.

The Swiss investment bank noted that just as flows in Jupiter's dynamic bond fund were stabilising, after £4.2bn worth of outflows in 2018, long-standing portfolio manager Alexander Darwall will cede his management of the group's European and European Growth funds after 18 and 12 years, respectively.

Mark Nichols from Columbia Threadneedle will assume the PM role of Jupiter's second and fifth largest funds, while Darwall will remain with the firm to manage its European opportunities trust and some institutional mandates.

"We expect his departure from the PM role of these two funds will drive an acceleration of outflows at Jupiter.

"We examined more than 70 departures of PMs with more than ten years tenure in Europe and found that those funds suffered an average 15% of net outflows over the following 12 months (with the outflows concentrated in the first three months)," said UBS.

As a result, UBS reduced its 2019/20 flow forecast for Jupiter by a total of £1.1bn, driving a 2% reduction to the bank's 2019 EPS estimates, a 5-6% decline to its 2020-21 EPS estimates and an 8% cut to its price target to 325p.

"Jupiter's concentration to specific funds (and their fund managers) is elevated versus peers (and is reflected our 'sell' rating for the stock). The biggest risk to our downgrade is if the forecasted outflows from the two European funds do not transpire," concluded analysts Michael Werner and Federico Braga.

Analysts at Liberum reiterated their 'buy' recommendation for shares of Equiniti, telling clients that the latest update from the company confirmed he "momentum" in the business.

With Equiniti management having said that 2019 "started well" and that integration of the WFSS operations that it acquired from Wells Fargo was going well, the analysts stuck to their estimates for fiscal year 2019 revenue growth of 5% and for EBITDA to rise by 10%, as well as their projection for net debt at period end.

Liberum also highlighted Equiniti's ability to keep all of the clients who had come up for renewal and its "encouraging" new client wins, including National Grid, Danske Bank and DWF in the UK.

The broker added that: "Encouragingly, the company continues to make progress with its plans to cross-sell services into the North American market, supporting our forecasts for an acceleration of growth in FY19 relative to the rates achieved in 2H18."

Liberum also believed that the roughly 35% discount that the shares were trading on in terms of their price-to-earnings multiple versus peers Computershare and LINK would unwind over the next 18 months, given Equiniti's increasing diversification and on the back of the successful integration of the EQUS assets.

The broker stood by its 290p target on the shares.

Metro Bank needs to demonstrate over the remainder of the year that it is capable of generating less capital-intensive balance sheet growth, but while "bruised" in the wake of January's warning on capital, the lender's model remained intact, analysts at Jefferies said.

That capital warning resulted in a £566m drop in deposit balances, with half of that coming from reductions in retail partnerships.

But excluding partnerships, retail deposits increased during the first quarter and were 33% higher year-on-year, Jefferies pointed out and also noted that at 2.80%, the lender's net interest margin plus fees was trending 10 basis points above the broker's expectations for the fiscal year 2019.

Cost growth of 2% year-on-year on the other hand was "high" versus Jefferies's expectations.

Regarding Metro's depleted CET1 capital buffers, which fell by 100 basis points quarter-on-quarter during the first three months of the year to 12.1%, Jefferies pointed out that 40% of the decline was the result of the shift to IFRS 16. The analysts believe that a £350m capital raise would suffice to boost its CET1 cushion by approximately 360 basis points.

"The bottom line on Q1 19 results shows that January’s capital warning had a transitory impact on deposit balances.

"In terms of earnings estimates, we see near-term risk from a disappointing outcome (i.e. underlying Q1 PBT of £5.0m compares to a scant consensus of £6.6m). MTRO needs to illustrate over the remainder of the year that it can generate less capital intensive balance sheet growth."

Jefferies kept its 750p target price for the lender's shares, reiterating its recommendation to 'hold'.