Broker tips: Barclays, Prudential, Schroders

10th Nov 2010 13:08

Nomura expects downgrades to Barclays' consensus numbers after the banking giant's trading update on Tuesday."We view consensus for fiscal year 2010 and 2011 as too optimistic", says analyst Robert Law. "We estimate £5.35bn for 2010, against a consensus of £5.8bn and have £6.8bn for 2011, against £7.6bn."Performance in the UK traditional banking business was ahead of estimates "with further recovery expected". However, group pre-tax profit was in line, "due to Barclays Capital (BarCap) and losses from its international banking businesses", Law said.The group reassured investors that it can meet the stricter Basel III capital requirement rules without recourse to an equity issue, but the broker remains concerned about BarCap, which still represents 60% of the pro forma group risk-weighted assets.Investors looking for exposure to the UK banking sector are advised by Nomura to take a look at Lloyds Banking Group, as it looks more geared to any recovery in domestic banking, "without regulatory overhang from a capital markets business".Nomura sees only a modest recovery in the shares short term and regards any re-rating as capped until the market is more convinced that the group can achieve an attractive RoE at BarCap and at the group level."We estimate the current BarCap RoE [(return on equity)] would be 10-12% on £30bn of equity and project a normalised group RoE of 10% in 2012."The broker reiterates a 'neutral' rating and a target price of 300p.Panmure Gordon has retained its 'buy' rating for insurance behemoth Prudential, with the third quarter statement pointing to "fast and profitable growth".The results for the third quarter show "a strong performance across the board", says analyst Barrie Cornes, with nine-month sales at £2.46bn annual premium equivalent (APE), 24% higher than the prior year period, and in line with consensus."Specifically, Asia remains the powerhouse with momentum continuing, highlighted by nine-month sales of £1.07bn APE" - an increase of 32% compared with last year - "reflecting record new business sales in each month of the third quarter," Cornes said.New business profit at £621m represents 46% of total new business profit and has been driven by "a focus on writing better margin regular premium business (94% of total).""This is a straightforward set of figures and helps reinforce the strength of the group, particularly in Asia where, despite the AIA 'loss', the company is still delivering in spades."The share price is trading close to the broker's estimated 2010 embedded value of 637p per share. "We believe that following the successful initial public offering of AIA there is an obvious and compelling read across to the valuation of Pru's Asian operation".The broker notes that the current implied valuation of the group's Asian operation is £8.2bn, whereas Cornes believes it is worth "an absolute minimum of £11.8bn".Based on a sum-of-the-parts valuation the broker has a price target of 781p per share. Despite Singer Capital Markets upgrading full year forecasts for Schroders by 3%, the broker is retaining its 'fair value' rating for the fund manager and highlights a preference for Aberdeen Asset Management.With a record level of inflows in the year to date, assets under management (AUM) for Schroders have reached a new high of £181.5bn, says the broker, compared with its forecast of £179bn.Asset management profits of £85.9bn were higher than Singer's £79m estimate, primarily due to performance fees which amounted to £7.7m in the third quarter, which the broker had estimated to be zero."We do not anticipate fourth quarter performance fees will meet the £28m booked in the fourth quarter last year", says the broker. "But nevertheless, tentatively assuming £10m for the fourth quarter, performance fees drive an upgrade to earnings".Singer upgrades earnings per share (EPS) by 3% from 93.9p to 96.6p due the higher level of performance fees. Higher AUM and "positive market movements" has pushed the broker to also upgrade 2011 EPS by 4%."The shares offer good gearing into rising equity market and we would expect the shares to continue to outperform if positive conditions persist"."However, the same exposure can be achieved more cheaply elsewhere in the sector and we continue to express a preference for Aberdeen which trades on 12.1 times 2011 calendar estimated EPS."The target price is upgraded to 1,560p, from 1,500p.