Broker tips: Lloyds, Clarkson
Goldman Sachs upped its stance on Lloyds Banking Group to 'neutral' from 'sell' on Tuesday, lifting the target price to 66p from 57p as tail risks recede.
GS said its 'sell' thesis was predicated on its assumption that ring-fencing would result in lower mortgage pricing and thus adversely impact Lloyds’ profitability.
"While mortgage pricing has fallen markedly since, Lloyds has been able to offset this through consequent deposit repricing, changes in loan book mix and increases in the structural hedge.
"Two base rate hikes have also helped. This, together with benign asset quality trends resulted in Lloyds outperforming our banks coverage."
It noted that since adding the shares to the 'sell' list in September 2016, they are up 13.9% versus Goldman's coverage down 0.1% and the FTSE World Europe up 8.5%.
Goldman said it now incorporates two further base rate hikes in its estimates and lowers its cost of equity assumptions to reflect receding tail-risks.
"Lloyds should benefit from higher rates through its structural rates exposure (equity and non-interest bearing deposits) and deposit beta (i.e. by not passing on the benefit of rate hikes in full to interest bearing deposits).
"However, we continue to forecast lower mortgage pricing to adversely impact profitability. That said, further rate hikes are likely to reduce the overall impact somewhat."
Analysts at JPMorgan Cazenove upgraded Clarkson to 'overweight' on Tuesday after the shares dropped 13% on the shipping services company's cautious outlook a day earlier.
JPM said Clarkson's full-year results were 4% ahead of its estimates, with broking strength offsetting ongoing financial weakness and head office IT spend.
Clarkson's 2018 trading was "a tale of two halves", according to JPM - with group profit down 22% in the first but up 3% in the second.
"Market data related to Clarkson continues to be largely favourable," said JPM.
"We see the upcoming IMO 2020 fuel regulations as potentially providing a strong tailwind to freight rates later in 2019 and into 2020. Shorter term, ongoing macro uncertainty and the recent Brazilian dam collapse are causing some headwinds."
The broker expects Clarkson's medium-term outlook to continue to improve despite a higher second-half weighting in its current trading year due to macro uncertainty and the recent dam collapse.
JPM kept its pre-tax forecasts for Clarkson unchanged but dropped its target price by 3% to 2,787p on the back of minor model changes in the group's results.
The analysts said they upgraded given the improving outlook and as the share price reaction provided "an attractive entry point".