Broker tips: Qinetiq, challenger banks

 Source: ShareCast   |   Publish date: Thu, 16 Feb 2017, 02:50 PM   |    >> Read article in News website

(ShareCast News) - Canaccord Genuity downgraded defence technology specialist Qinetiq to 'hold' from 'buy' as it noted the company's solid third-quarter update on Wednesday but said shares were up with events.
The brokerage said that following recent strong trading, which saw the shares rise 17% over the last three months, Qinetiq is now valued in line with the sector on an EV/EBITDA basis and at a premium of around 10% on a price-to-earnings valuation.

"Given the company's solid track record, order visibility, balance sheet strength, and investment optionality we think a premium rating to peers is deserved. We also think there is further upside potential to our current forecasts with bolt-on M&A, increased capex, and contract extensions - all of which have been demonstrated recently - and view the more positive outlook for Global Products as encouraging."

However, Canaccord said another major earnings accretive M&A transaction is less likely in the near term given the likely focus on successfully integrating the Meggitt Target Systems business.

The brokerage expressed confidence that QinetiQ will continue delivering margins above the baseline profit rate, but said there is still some uncertainty as to the degree the Single Source Regulations Office will revise margins.

Canaccord maintained its 285p price target on the stock.

Challenger banks

Panmure Gordon initiated coverage on several challenger banks on Thursday, highlighting a preference for specialist lenders as they have avoided direct competition with large UK banks and offer high growth and returns at attractive valuations.

The brokerage started Aldermore, OneSavings, Shawbrook and Virgin Money at 'buy' with price targets of 285p, 390p, 355p and 400p, respectively.

It initiated coverage of CYBG and Metro Bank at 'sell' with 245p and 2,700p price targets, respectively

Shawbrook is the brokerage's top pick as it is the most specialised of the lenders and already operates as a major player in more niche markets, including structured & asset finance and consumer lending focused on home improvement loans.

"The bank focuses on lending to SMEs through a bespoke offering and has bucked the trend towards using intermediaries. Instead, around 75% of lending in Asset Finance is originated directly, enabling it to leverage on early investment and monitor underwriting closely."

It likes Aldermore for its relatively low risk diverse mix of mortgage and SME lending which serves a significant, structural market need and is supported by a scalable operating platform driven by a strong intermediary distribution channels.

The brokerage said the stock offers good value relative to the sector and its peers.

As far as OneSavings is concerned, Panmure said it reckons that despite buy-to-let market concerns, changing demographics and a focus on professional landlords will lead to continued strong loan growth. It added that the stock is undervalued.

Panmure argued that Virgin Money is more of a true challenger bank given its Northern Rock origin with its business model mirroring the high street banks.

"However, already generating double digit returns and a focus on higher margin credit cards, we believe that the market undervalues its return potential due to concerns about higher RWAs but we mitigate this by assuming low dividends and high capital buffers."

Panmure said it is not keen on CYBG as it reminds it of the low growth and returns and continual restructuring costs recently seen at large UK banks, or Metro Bank for its exorbitant 2017E P/TBV of 3.9 for no profits.

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