Broker tips: Lloyds, Friends Provident, Venture

13th Jul 2009 13:05

Reports in the Sunday Times that Lloyds Banking Group may report interim losses of £6.3bn are "entirely plausible", according to stockbroker Nomura."The group itself has indicated it expects to be in loss for the year as a whole. It has also warned that corporate credit loss charges will be up to 50% higher than last year. Accordingly, we already have full year pre-tax loss estimates of £10bn, including an assumption for credit losses of £22.5bn (the Sunday Times article suggests full-year credit losses of over £20bn)," the broker notes."Our negative view of Lloyds is due to the pressure we see on the group's sustainable profitability, partly as we view it the most exposed to the structural uncertainties from funding (i.e. its loans/deposits ratio) and to the current sector margin pressures," Nomura said. Broker Panmure Gordon reckons the shareholders who hold stakes in both Resolution and Friends Provident will be the key to whether the current courtship of the latter by the former will end in marriage."As we see it, FP's [Friends Provident's] shareholders have a fairly clear choice between a stand alone strategy, and one that is stand alone 'Plus'. The two management teams know each other reasonably well from past discussions and, given the common shareholder base, an acquisition makes sense," the broker's analyst Barrie Cornes believes."We have previously written that we believe Friends Provident is strategically hampered by its positioning in the UK Life market, where its key product lines are Group Pensions (a competitive market place) and Protection (housing market exposed)," Cornes adds, speculating that other bidders may emerge for Friends, though he thinks "an all cash or large cash element approach is unlikely given the current investment market constraints.""On that basis, unless an approach from another suitor is at a significant premium to Resolution's, we think that shareholders should welcome a revised approach from Resolution. We maintain our Hold recommendation and 75p target price," the broker concluded.Having been given a "put up or shut up" deadline Centrica has decided to "put up" and launched a bid for Aberdeen-based oil and gas firm Venture Production at a level which may be enough to win the day.The energy giant is offering 845p per Venture share, a price which values the target company at £1.3bn. This is too low, argues Venture's management, a view which broker Evolution Securities believes is widely held in the market, not least by major shareholders Larry Kinch and ArcLight, which have rejected the bid.Nevertheless, Evolution believes Centrica still has a decent chance of succeeding, thanks to the 30% stake it already holds in Venture, which means it needs acceptance from shareholders controlling just 20.1% to win the day."We expect other shareholders might just decide to draw a line in the sand, accept the offer and re-cycle their cash," Evolution predicts. "After all, the prospect of owning shares in a listed company where the management team and major shareholder are increasingly hostile towards each other is not that appealing," the broker comments.Merrill Lynch is another that believes Centrica is bidding from a strong position with Venture's ability to block the deal limited "particularly because (1) we see a counter bid as highly unlikely, and (2) the exploration programme lacks transformational wells," the US brokerage suggests."The fact that 3i, involved in Venture since its creation in 1997, disposed of its stake is a crucial step for Centrica and marks the limited upside that now Venture offers, in our view," Merrill Lynch concludes.