Numis reiterates buy on Shawbrook after big hike to earnings forecasts
Numis hoisted its earnings forecasts for Shawbrook significantly after the challenger bank delivered strong results and outlined an upbeat outlook.
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Shawbrook Group
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Shawbrook, while also rejecting a 330p-per-share takeover bid from private equity backer Pollen Street, reported 2016 results that showed profit before tax of £88.2m and earnings per share at 29.8p, putting the shares on a historic p/e rating of 10.5.
Keeping its 'buy' rating, the broker hefted its earnings per share estimate for this year by 16% to 34.7p from its previous 29.8p forecast.
For 2018, EPS is expected to rise to 40p, a 3% increase in the estimate from 38.7p.
"The reason for the gap in the EPS change between the two forecast years is because our previous 2017 estimates had factored in a mild recession in the UK and we now expect GDP growth of circa 2%," said analyst James Hamilton.
As a result, with its shares closing on Tuesday at 314p, Shawbrook was being valued at just 9.2 times 2017 earnings or 8.0x 2018 earnings.
Based on management's pledge for a 30% payout ratio for 2017 and 2018, the bank is forecast to have a 2017 dividend yield of 3.3%, increasing to 3.8% in 2018.
While some investors are concerned about the 20% growth target and the 35% cost-income ratio target, Hamilton believes Shawbrook’s overriding target is a 22-25% return on average equity.
"Given it is already achieving that target, growth isn’t required and we believe Shawbrook would happily restrict growth to maintain returns.
Given Shawbrook’s modest scale, he sees the potential for it to grow even if the UK is heading into a downturn, pointing to Close Brothers' successful passage through the credit crisis and Provident Financial's growth driving a high cost-income lower that enabled its Vanquis arm to move into profit through the crisis.
"With the commodity capital banks having large and very profitable segments to attack we believe the 2020 targets are achievable."