Home | Log In | Register | Our Services | My Account | Contact | Help |
BUY OR SELL:Time to buy Lloyds ahead of expected cash call? -- By Clara Ferreira-Marques
LONDON (Reuters) - Shares in Lloyds Banking Group are down 20 percent from their 2009 peak and trade on a discount to the European sector in terms of their multiple to prospective earnings.
So is now a good chance to buy, despite a bumper rights issue on the horizon?
BUY INTO RECOVERY
Britain's largest retail lender is considering whether it should exit a government-backed insurance scheme for bad debts.
It is expected to replace that costly safety net with a heavily discounted rights issue of over 11 billion pounds, complemented by possible asset sales and a debt exchange, analysts and industry sources say.
Analysts say that with most bad news priced in, pulling out of the Asset Protection Scheme (APS) -- no longer seen as value for money -- could be a catalyst for the stock, despite dilution as a result of the rights issue and a fee payable to the government for the protection Lloyds has already received.
Lloyds shares are trading at around 90p, vs an August peak of 113.5p. Analysts' median price target for the shares is currently 105p, according to Thomson Reuters I/B/E/S.
Analysts at investment bank FBR Capital Markets started the stock this week with an "outperform" rating and a 115p target price, "which suggests more than 25 percent upside from the current price and significantly more than the average price should Lloyds undertake a rights issue.
"The bank has suffered significant losses and pressures over the past two years, but we believe that if it can raise approximately 15 billion pounds in a public rights issue, it will be undervalued based on 2012 normalized earnings and price/NAV," FBR analysts said.
Analysts at brokerage Evolution, which initiated the stock with a "buy" rating on Tuesday, said: "Of course, in per share terms, (an estimated fundamental value of 69 billion pounds) will be very considerably diluted by the 15 billion rights issue and 5 billion pound debt/equity swap that we consider imminent.
"But even after all that, our (sum of the parts) valuation model yields a (theoretical ex-rights price) TERP-based target of 96p. All in, we calculate that investors buying a share of Lloyds today and participating in the upcoming rights issue could enjoy a 41 percent upside to our 96p target."
A rights issue at a 50 percent discount, out of Lloyds' current share price of 91p, would have the stock trading ex-rights at 66p, according to Evolution -- 8 times forecast 2011 earnings and 0.8 times price/tangible net asset value (tNAV). That compares with 10 times 2011 P/E and 1.5 times price/tNAV for the European sector.
SELL ON MULTIPLE RISKS
Risks remain high for Lloyds, not least a slower than expected or W-shaped economic recovery, the prospect of an EU antitrust ruling that would require major asset sales, and the possibility regulators will view an APS exit as too great a risk.
Analysts see a combination of loan losses and dilution eating into Lloyds' shareholder returns.
There is also uncertainty over the future shape of the group, with speculation over the EU's possible ruling stretching to branch divestments from the Halifax network.
"The risk of being required to downsize for reasons of competition or state aid is real and may not be positive for valuation, if Lloyds has to sell within a given timeframe," said analysts at Morgan Stanley, who have an "equal weight" rating.
Simon Maughan at brokerage MF Global, who has a "neutral" rating on the stock, said: "If you compare this stock to its nearest best alternative investment, which is Barclays , what is going to happen to net profit at Lloyds to compensate you for an over 80 percent increase in the number of shares?
"It is just exceptionally unlikely that net profit at Lloyds can grow so quickly that you can get over that dilution."