■ Loan book growing steadily
■ Winterflood recovering
■ Asset management boosted by inflows
Close Brothers (CBG) expects to deliver a solid full-year performance when final results are released on 24 September. In a trading statement this month, the financial services group’s three core divisions all revealed solid progress in the first five months of the second half. Perhaps most notably the banking division grew its loan book by 5 per cent to £4.6bn - reflecting steady growth in motor and asset finance - yet bad debt levels have remained broadly flat.
In the securities division, which comprises market maker Winterflood Securities, trading improved after a difficult first half. Although, while average bargains per day grew, investors tended to remain focused on lower-risk stocks with larger market values, thereby reducing income per bargain levels. Meanwhile Seydler, the group’s German securities business, delivered an improved performance - it benefited from increased debt capital markets activity in Germany.
Asset management benefited from a steady flow of new business inflows and positive market movements at the start of the year, and assets under management at end-June had risen 2 per cent to £9bn. However, assets in the following month jumped 8 per cent from the start of the year, and margins grew, thanks to stronger initial fees.
JP Morgan Cazenove says…
Overweight. We have a price target of 1,134p for Close Brothers's shares, based on the company’s strong earnings growth, a high return on equity (13.4 per cent in 2012) and a decent and well covered dividend. But despite this the shares are trading on an undemanding 13 times 2013's forecast EPS of 84.1p, falling to 11 times for next year (expect EPS of 94.2p in 2014). Moreover, there's a liquid balance sheet, that's well funded and strongly capitalised to support profit growth. The shares currently trade at twice 2012's net asset value, but this ratio falls to 1.9 times for 2103 and 1.7 times for 2014. Expect a 44.5p dividend for end-July 2013.
Shore Capital says…
Hold. A more positive tone in the securities division has prompted us to revise our adjusted pre-tax profit estimate for the year to end-July from £158.6m to £161.6m, giving adjusted EPS of 81.9p. However, forecasts for 2014 remain unchanged at £186.8m and 96.1p given the inherent uncertainty in forecasting profits from the securities side. On a sum-of-the-parts basis we see fair value at 990p, based on 2014 forecasts, where we apply a PE ratio of 10 to the banking division and six to a five-year rolling average of securities division earnings. The key value driver would be the banking division, where a 1 per cent increase in the PE ratio would shift the valuation up by around 90p - but we see no reason to chase the shares at the current price.
