Broker tips: Lloyds, Rio Tinto, MITIE

3rd Feb 2014 12:50

Lloyds Banking Group is expected to report a 'small' statutory loss after tax after setting aside a provision to cover the cost of compensating customers for mis-sold payment protection insurance (PPI).The lender has put aside £1.8bn in the fourth quarter for PPI and a further provision of £130m relating to the sale of interest rate hedging products to certain small and medium-sized businesses. As a result the group predicts a 'small' statutory profit before tax for the year, and a pro-forma fully loaded common equity tier 1 ratio of 10.3%, in line with guidance.The lender forecasts 2013 underlying profit of £6.2bn, missing Jefferies forecast of £6.4bn but beating the consensus of £5.8bn.Lloyds also said it expects talks with the UK regulator to restart its dividend payments at a "modest level" will begin in the second half of 2014. Jefferies said: "The timing of dividend payouts is consistent with our long-held views regarding repatriation of capital for LLOY. The 'modest level' is disappointing to us as we had factored in a 40% pay-out in 2015, which looks optimistic in light of today's announcement. We would not expect a 50% pay-out until 2018 at best."The broker recommended a 'hold' rating and price target of 69p.Rio Tinto´s drive to significantly lower its levels of capital expenditure will yield strong positive free cash flows (FCF). That means there is 'up-side' to consensus expectations for an eight per cent dividend increase (Credit Suisse: 15%) and holds out the prospect of a steadily growing and 'dependable' dividend pay-out, thanks to the outfit's now leaner balance sheet, analyst J.Gurry at Credit Suisse said on Monday. Hence his decision to reiterate his 'outperform' recommendation on the stock, alongside a target price of 4,000p, and add it to their 'Focus List'. Particularly noteworthy, the analyst goes on to explain that his forecasts for the company´s free cash flow remain true "even under almost all commodity price scenarios". The company is due to publish its full-year results on February 13th. Rio Tinto´s net present value (NPV)-based target price offers near 30% potential upside, while its single digit earnings multiples are currently over-compensating for the expected fall in the price of iron ore, Gurry said. The firm´s shares were trading at nine times earnings per share (EPS) and five times earnings before interest taxes, depreciation and amortisation (EBITDA).As a cross-check, he explained that based on 2015 guidance for iron-ore production at its Pilbara mine of 330mt, and a $90/t price for iron ore, then the company´s earnings per share would be at $5.70. That would equate to a share price of 4,100p and a still strong balance sheet ($13bn net debt), strong FCF ($19bn+ EBITDA and $8bn in capex guidance for 2015).Investec recommended buying shares in MITIE after the strategic outsourcing specialist reported organic growth in the third quarter, driven by a mix of new and expanded contracts.In its interim statement on Monday, MITIE said it was 'well-positioned' to deliver good organic growth and strong margins in its facilities management and healthcare segments.Levels of bid activity at its facilities management division saw an uplift during the third quarter in both the public and private sectors.However, it had experienced some delays in the start of new contracts in its property management arm, the company said in an interim trading statement (IMS) for the third quarter of its fiscal year."The Facilities Management division continues to be the engine for growth, albeit the progress being made in Healthcare bodes well for the anticipated growth prospects in this sector," Investec said. "The re-positioning of the business towards higher margin and higher growth markets continues at pace and this gives us increasing confidence behind our current estimates."The broker added that the company was well place as it noted the progress in re-positioning the business and a mix contracts and growth opportunities in Healthcare.Investec retained its underlying forecasts and said it was becoming "increasingly positive on the risk/reward profile and therefore lifting our DCF-based target price to 360p".AB