Broker tips: Paragon Bank, National Grid
By Iain Gilbert
Date: Thursday 10 Jun 2021
(Sharecast News) - Numis upped its earnings estimates for Paragon Bank after a strong set of results from the specialist buy-to-let lender.
The bank, which reiterated its 'hold' rating on the stock, posted a near 70% jump in half-year profits on Tuesday, fuelled by growing demand for rental properties and buy-to-let mortgages, and said impairment charges had fallen to £6m. It also reinstated its dividend and announced a £40m share buyback.
In a report published on Wednesday, Numis said: "Following better-than-expected credit quality reported with the first-half results, which saw impairment decline by 80%, we have increased our underlying earnings per share forecast for this year by 24% to 49.0p from 39.3p.
"We have modestly upgraded up forecast for next year by 10%, to 55.0p, and by 6% to 61.0p for the year to September 2023.
"We have also adjusted our capital distribution assumptions, and now expect Paragon to buy back shares, as opposed to paying a special dividend, as a consequence of the surplus capital that is within our forecasts.
"The buyback adjustment has made a material contribution to our EPS upgrades, with our 2023 pre-tax profit increasing just 1% to £190.2m."
Numis conceded that with government support still in place, it remained too early to see how the economy would fare post-pandemic but it expects Paragon's net interest margin - the difference between saving and lending rates - to expand in the second half.
Citi increased its share price target for National Grid based on the company's shift towards electrification.
The FTSE 100 power network group announced a shift in strategy in March when it agreed to buy Western Power Distribution, the biggest UK electricity distribution business, for £7.8bn to focus on electricity while shedding gas distribution assets.
Citi said it believed investors would continue to back the company's strategy. National Grid shares have gained about 14% since early March. Analyst Jenny Ping raised her price target to £10.03 a share from 970p and restated her 'buy' rating on the stock.
"In our view, the market should continue to support the strategic transformation of NG towards electrification. We continue to see material scope for net zero related network growth in the UK [in] which NG could play a leading role."
Ping also said there was a chance the shares could do better than her target if National Grid wins its appeal to the competition regulator over cuts to returns proposed by the energy watchdog Ofgem.
"We continue to see valuation upside with the stock offering one of the highest regulated asset base[s] and EPS growth among the UK utilities," Ping said in a note to clients.
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