Broker tips: Lloyd’s, Keywords Studios
Analysts at Berenberg cut their target price for shares of Lloyds, telling clients that past actions by the lender to prop up interest margins had made it more vulnerable than peers to cyclical headwinds for its revenues and loan losses.
"While banks cannot alter their operating environment, we believe Lloyds' strategy compounds rather than eases these pressures," they said. Lloyds also said that from a valuation point of view, the stock was "far from cheap".
"With Lloyds' shift towards higher-margin loans now largely exhausted, underlying pressure on the bank's NIM is becoming more visible and continues to be compounded by weak volumes. We expect these headwinds to persist."
The analysts were anticipating a roughly 3% drop in the lender's net interest margins in 2019 "with limited growth prospects thereafter".
They also lowered their revenue estimates for 2019-21 by approximately 20% for each year, with the impact on its 2019 EPS estimates for the lender made worse by the greater conduct losses recognised during the first half of the year.
"Partly as a result, we reduce our price target to 55p from 60p."
Lloyd's hedging strategy was an incremental risk, they added.
Furthermore, it would be difficult to replicate the insurance unit's 20% growth seen over the second quarter, which had boosted non interest income past analysts' expectations.
The balance sheet also had weaknesses, they argued, saying that: "UK stress tests suggest that Lloyds has worse-than-average asset quality in key UK lending segments."
As a result, the German broker lowered its target price from 60p per share to 55p, but kept its recommendation for Lloyds' shares at 'hold'.
Still at Berenberg, analysts lowered Keywords Studios from 'buy' to 'hold' on Thursday, noting that although its recent organic growth had been "exceptional" and the firm's mid-term organic outlook was "robust", the investment required to fulfil accelerating demand was depressing margins.
While Berenberg said the margin pressure should "only be temporary", with consensus pre-tax profit expectations requiring margins to improve "materially" in the second half, it felt the risk to near-term estimates had increased.
The German bank noted that Keywords delivered pre-tax profits of €18.4m, up 15% year-on-year, representing a margin of only 12% as a result of the group expanding its facilities during the period, as well as accelerating recruitment and training to meet its demand pipeline, which has accelerated faster than initially anticipated.
"While this additional investment stems from a positive catalyst – strong organic demand – and therefore bodes well for the medium-term outlook, it does raise concerns about whether Keywords can meet its margin guidance for FY 2019," said Berenberg, which also stated, "the room for error has narrowed".
Despite the increase in its revenue forecasts, Berenberg also highlighted that in order for Keywords to meet its full-year pre-tax profit estimates, margins would need to increase by 390bp to 15.9%.
"With the shares trading at 32x FY 2019 P/E, we feel the valuation is full and downgrade to 'hold'," said Berenberg. The analysts also raised their target price on the firm to 1,620p from 1,600p.