Interest rate cuts in UK and US will be a sustained drag on Equiniti's profits, Berenberg says

Analysts at Berenberg slashed their target price for shares of Equiniti, telling clients that recent interest rate cuts by central banks would result in a sustained challenge to the group's growth targets.

In their opinion, the impact of the pandemic "should largely be considered one-offs".

Interest rate cuts in the UK and US on the other hand would have more material and sustained effects, they said.

Interest income accounted for fully 54% of Equiniti's profits before tax in 2019 and interest rate hedges were set to come off.

As the hedges unwound over the next three years, this will have a continued negative impact on group earnings and cash generation, they said.

A rebound in earnings, helped by cost savings, was still expected in 2021, but "future growth will be materially harder to come by, given this ongoing headwind."

The group's "relatively high leverage" - estimated at 2.7 times for 2021 - was another potential headwind.

"It is difficult to see how Equiniti will be able to return to its prior ambitions of mid-single-digit organic growth and gradually improving margins.

"With this lack of clarity, we lower our price target to 120p and retain our Hold rating."