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Broker tips: Hargreaves Lansdown, J Sainsbury, Barratt Developments, Bellway, Berkeley Group

By Iain Gilbert

Date: Monday 24 Jan 2022

Broker tips: Hargreaves Lansdown, J Sainsbury, Barratt Developments, Bellway, Berkeley Group

(Sharecast News) - Bank of America Merrill Lynch upgraded Hargreaves Lansdown to 'buy' for the first time on Monday as it said the company's gearing to rate rises and potential benefits from increased engagement in share trading are underappreciated.
The bank, which lifted its recommendation from 'neutral', said its forecasts sit 5- 21% above consensus, largely due to its reflection of Bank of England base rates increasing to 75 basis points by year-end.

BoA said its strategists forecast BOE base rates increasing from their current level of 25bps to 50bps on 3 February and 75bps in November.

"This has led to a 17% boost in our EPS forecasts by FY24E, as cash margins increase from 19bps in FY22E to 72bps in FY24E," said the analysts.

"We do not allow for any further hikes beyond 2022 and believe much of the benefit of further hikes would be passed to customers. Higher bank account rates could, in time, also make Active Savings profitable."

The bank, which also said share trading frequency trends were not appreciated, upped its price target on HL shares to 1,625.0p from 1,475.0p in order to reflect the benefit of rate increases and implying around 30% total return potential.

Analysts at Berenberg slightly raised their target price on grocery giant J Sainsbury from 275.0p to 285.0p on Monday following the group's third-quarter results.

Berenberg stated Sainsbury's third-quarter numbers revealed that stronger-than-expected grocery demand had driven a profit guidance upgrade, offsetting demand weakness at Argos.

The German bank noted that moving into 2022, inflationary pressures looked set to increase, but added it expects grocery demand to remain "resilient".

Moreover, Berenberg believes Sainsbury's will be able to mitigate cost pressures via supplier negotiations, self-help opportunities and operational efficiencies.

"We believe management's navigation of the risks from the pandemic and profit delivery track record provides confidence on executing its medium-term targets," said Berenberg.

However, despite the modest increase to their price target, the analysts highlighted that with shares up by more than 40% from pre-Covid-19 pandemic levels, they believe the risk/reward for Sainsbury's shares has already priced in.

Jefferies downgraded its recommendation on UK housebuilders Barratt Developments, Bellway and Berkeley Group to 'hold' from 'buy' on Monday as it assessed the impact of cladding issues.

It said that whether housebuilders should or will shoulder the whole burden of cladding remediation is a "complex and emotive" discussion. Even including a worst-case scenario of 12% tax rate to fund remediation, it still sees value in the sector.

"Against the backdrop of what could be a loud campaign from government, share prices could see significant volatility in the coming months. However we still believe there to be opportunity in the sector."

As far as Barratt, Bellway and Berkeley were concerned, Jefferies said that for the housebuilders who provisioned under the previous scope - buildings above 18 metres - and/or where they were the "responsible person", it sees risk of further one-off charges and cash outs for cladding remediation, as well as negative PR.

"At this stage we believe even the housebuilders themselves do not know the full extent of the cost (M&A through the period, lack of access, uncertain 'solutions', labour constraints, clawback from freeholders) but with approximately 55% of the high rise buildings requiring remediation in London, we believe it is fair to assume the exposure to those with a long history of build in the Capital could be more substantial," it said.

"Until there is greater understanding of the scale and cost of remedying their own build, our price targets reflect this higher risk profile, and share price performance constrained."

The bank cut its price target on Barratt to 644.0p from 851.0p, while Berkeley's was reduced to 4,703.0p from 6,212.0p and Bellway was cut to 3,339.0p from 4,187.0p.

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