Broker tips: M&S, Lloyds, housebuilders

1st Jul 2009 12:46

The first quarter trading update from Marks & Spencer has pleased the market, with the food division showing its third consecutive quarter of improved performance.Singer Capital Markets, which believes the shares are fairly priced, acknowledges that first quarter sales were "considerably better" than in the preceding periods, but notes that the High Street giant's performance was helped by a number of factors, including its 125th anniversary campaign, seasonal weather, the timing of Easter and weak comparatives from 2008.The Easter timing effect is estimated to be worth 0.7%, thus implying an underlying like for like (LFL) decline in UK sales of 2.1%. "Assuming no change to gross margin guidance today, we believe today's sales figures ought to add between £10-15m to full year PBT estimates, an upgrade of c2-3%," the broker concludes.The love-fest for British banks from brokers this week came to an end Wednesday when Credit Suisse cut its price target for part-nationalised lender Lloyds Banking Group.While conceding that sentiment towards the bank was improving, Credit Suisse is in no hurry to join the fan club."Some of our concerns are short term, like shrinking deposit revenue that we don't think will be significantly assisted by structural hedges. Indeed, we doubt HBOS, which accounts for 56% of Lloyds' deposits, has any significant formal hedge in place," the Swiss bank said.As for medium term concerns, these include "the fact that 19% of HBOS corporate loans (excluding overseas and financials) are not paying." Credit Suisse sees HBOS's income falling as it writes off these non-performing loans.Over the longer term Credit Suisse has concerns over "pre-funded deposit protection schemes, more onerous capital requirements - particularly as risk weighted assets re-inflate - and the potential impact of any EC ruling.""With the outlook so unclear, we don't much like the concept of 'normalised EPS', but we think 8p post 2012 is reasonable. This is 6p in present value terms and given the risks, that leaves Lloyds looking expensive, in our view," CS concludes.The bank has trimmed its price target for Lloyds to 50p from 55p.The share price revival by housebuilders ran out of steam in June but Merrill Lynch believes many of the big names in the sector are undervalued and trading on a "worst case scenario" basis.The broker has upgraded Taylor Wimpey and Persimmon from "neutral" to "buy" on valuation grounds. Merrill Lynch believes all of the bad news is now priced into the shares of the big two in the housebuilding sector, though it does not expect any significant upturn in trading fortunes for the sector in the near term.The broker also upgrade Bovis Homes from "underperform" to "neutral" and reiterated its "buy" recommendation on Redrow.