Broker tips: Lloyds, InterContinental Hotels, Hays

26th Sep 2016 16:58

(ShareCast News) - Goldman Sachs cut its stance on Lloyds Banking Group to 'sell' from 'neutral' and trimmed the price target 6% to 50p as it pointed to increased competition and low rates.GS pointed out that Lloyds saw a market decline in new business share in the first half of this year, which led to a 3% annualised decline in mortgage balances.Goldman said it sees two further sources of incremental competition from here."(1) HSBC will continue to strengthen its intermediary distribution as it seeks to deploy significant excess deposits into UK mortgages; (2) the Term Funding Scheme will provide the 'challengers' with a very low-cost funding source."We view Lloyds' margin maintenance strategy as optimal. Nevertheless, we believe increased competition will have a significant impact on profitability, and downgrade our rating."GS cut its earnings per share estimate for 2016-18 by 0%-10%, mostly to reflect a 10 basis point cut to the base rate in November and a continued drop in mortgage balances.Goldman said management is pursing the right strategy by choosing to protect margins over market share or even stock, as a substantial pricing cut would have an even more pronounced impact on earnings."A key question for the group going forward will be by how long it can delay significantly lowering its mortgage pricing. Ultimately, we believe it will have to mark to market its pricing at some point. This is when the P&L is likely to take a further hit." Morgan Stanley downgraded InterContinental Hotels Group (IHG) to 'underweight' on Monday after the shares' recent outperformance and on concerns that the US hotel cycle is peaking.After rising 10% in the year to date, the price target was trimmed to 3,100p from 3,300p and saw a possible bear case of 2,000p as IHG was observed to now be trading at a 5% premium to its peers.While the Holiday Inn and Crowne Plaza owner has attractive and resilient business model, Morgan Stanley has some concerns.Growth in revenue per available room (revpar) in the USA has been slowing for some time, "and we think it will weaken further given declining occupancy, anaemic rate growth,accelerating supply growth, one-fifth of submarkets in RevPAR decline", while its analysis of 'compression nights' - those high-demand nights where market-wide occupancy levels are 95% or more - has suggested Airbnb now having an impact as well as a trend for independent hotels to outperform branded chains."If we match these occupancy/RevPAR trends to the last two cycles, IHG shares are holding up much better," analysts wrote.Forecasts for revpar have been reduced to 1.5% for 2017 and down to -1% in 2018 from earlier predictions of 2% growth, with the lower RevPAR offsetting another $500m stock buyback expected next year.While IHG is still a quality operator, analysts highlighted that all hotel stocks de-rate sharply when revpar drops off.In the last downturn, hotel stocks would on average move down to a price at 8-9 times EBITDA, whereas IHG is currently on 12 times 2017 expected EBITDA."M&A speculation may continue to provide support, but we think that IHG sees itself as more of a buyer than a seller, and it no longer owns 'trophy' assets. RBC Capital Markets downgraded recruiter Hays to 'sector perform' from 'outperform' as the stock has performed well and is now near its 140p price target.It pointed out that the stock has enjoyed a nice bounce and is one of the better-performing staffers year-to-date.Still, it remained fairly upbeat, saying that although UK trading is expected to be tough, this will likely be offset by Europe and Australia.RBC reckoned the company will be able to hold earnings before interest, tax and amortisation slightly above last year thanks to a robust picture in Europe and solid momentum in Australia, as well as a significant currency tailwind."Currency is a major tailwind, with the potential for special dividends now the balance sheet is near the £50m net cash mark," it said.The Canadian bank said that given macro uncertainty, temp markets are more robust than perms and Hays' mix of geographies and maturities helps provide some resilience.RBC highlighted the fact the group is now net cash and said it sees significant potential for special dividends going forward."With year-end net cash at £37m, this provides options and with a clear strategy to return any excess to shareholders (over £50m net cash), Hays can effectively return all its free cash flow yield to investors going forward, meaning an effective all-in yield averaging 6% per annum for the next few years."