Lloyds Banking Group
Tier one capital ratio 12.8%
It seems like a long while ago, but there was a time when Lloyds Bank was one of the best payers of dividends in the FTSE 100. There is every chance it will get back to that happy state of affairs, but there are a few obstacles to negotiate beforehand.
The bank used to hand out half of all profits to investors. Some bullish numbers from analysts suggest that Lloyds’ huge cash generation and attractive tier one capital ratio, 12.8 per cent in 2014 and so well ahead of requirements, should drive some generous payments in future.
The shares, little changed at 78½p, are now above the 73.6p that the government paid in its rescue and should stay there, all things being equal.
Assume a payout ratio of above 50 per cent in 2015 to 2017. On the numbers now being forecast, this suggests a forward yield of 5.6 per cent and 7.5 per cent in 2016 and 2017, respectively. On that basis, the next administration should have no difficulty offloading the shares.
Indeed, Lloyds is reckoned to have started work on a prospectus ahead of a full placing last year, before that plan was scuppered by a fall in the share price.
Yet this is not your typical privatisation, because Lloyds shares are already freely available, so any purchase will require a decent discount, the mooted 5 per cent suggested at the weekend looking like the barest minimum. It presupposes a Tory or Tory/ coalition victory, because Labour’s plans are as yet unclear.
Since Lloyds’ rescue in 2008, the landscape in retail banking has changed drastically with the emergence of the various “challengers”, not least the TSB. If the mooted purchase of TSB by Sabadell, of Spain, goes ahead, that would create a highly motivated new force in that market.
There are other uncertainties, not least any further fallout from mis-selling scandals such as PPI. Then there is the Competition and Markets Authority investigation into personal accounts and lending to small businesses, likely to report early next year.
I suspect that any damage to the banks from that will be limited, but the uncertainty will undermine the shares in the meantime. Plainly, the Lloyds issue will be attractive and priced to go — assuming that it ever takes place.
MY ADVICE Hold
WHY Eventual share sale, if it ever takes place, will be on attractive giveaway terms, but plenty of obstacles loom before then
Aveva
Forecast PBT for 2014-15 £61.5m
The oil price has risen by about a third since it bottomed out in mid-January and some are wondering if this represents the start of a full-blown recovery. I would be doubtful, although some of the signs are there, such as a decline in producing rigs in the United States.
Should this happen, though, one of the beneficiaries would be Aveva, whose design software gets almost half its business from the oil and gas sector. Its products are widely used by Petrobras, the Brazilian national oil company, which is mired in scandal. That is another reason why the shares were under pressure after a profit warning in the autumn.
The trading update yesterday was, of necessity, brief — the figures for the financial year to the end of March will be in line with expectations, which is as good as one can expect until Aveva’s core markets start to pick up again. I tipped the shares as being oversold at the start of the year at £12.80; they fell 26p to £15.74 amid profit-taking after those earlier rises.
They sell, therefore, on 22 times earnings for the current year, which looks like the nadir of Aveva’s fortunes. Not cheap, but they should have further to go as the good news comes through.
MY ADVICE Buy
WHY Shares highly rated but should have further to go
HSS Hire
Revenue £285m Dividend Nil
There was some concern that the stock market float of HSS Hire in February was overpriced. The company was keen for its customers to come on board and in the event about a fifth of the shares ended up with retail investors, the majority of whom, one must assume, are among the 70,000 small businesses that comprise that customer base.
They have not done terribly well. The shares were floated at 210p, at the bottom of the indicated 210p-to-262p range. They were unchanged at 209p after results for 2014 that were, inevitably, in line with expectations.
HSS has the option to acquire small bolt-on businesses, but the main engine for growth is opening new local branches, 13 in the first quarter and an expected 50 this year.
The utilisation rate, the main metric to judge its performance, was running at 47 per cent in the last quarter, high for that kind of business, and the stronger-than- expected demand at the end of last year brought forward some capital spending.
HSS mentioned the looming election as one potential uncertainty, but it is hard to see how that loyal customer base might be distracted by this. The shares are a proxy for UK economic growth and the strength of the construction industry; the dividend yield, once payments begin, is not much to write home about.
They sell on 17½ times this year’s earnings. That looks a little expensive compared with others in the sector and does not suggest any reason for an immediate outperformance.
MY ADVICE Avoid for now
WHY Shares look dear by comparison with sector
And finally . . .
Shore Capital has been speaking to the management of Greggs, in what the broker describes as “our most encouraging and optimistic meeting . . . for many years”. Greggs has had a disappointing couple of years since Ken McMeikan stood down as chief executive, but the chain has been reinvented, moving away from its humble sausage roll beginnings, with the prospect of developing a greater evening offering in due course. Shore is also encouraged by the prospects for significant shareholder returns in due course.
