City tips update: bulls back Rolls-Royce, IAG, Barclays, BATS
In the middle of a busy period for company results, Graeme Evans reveals what the analysts are saying after these popular FTSE 100 stocks published their numbers.
6th August 2024 15:52
by Graeme Evans from interactive investor
Shares in Rolls-Royce Holdings (LSE:RR.) and International Consolidated Airlines Group SA (LSE:IAG) have been backed to keep climbing after their long-awaited pledge to restart dividends was accompanied by forecast-beating results.
Bank of America has lifted its price target on Rolls from 600p to 675p, while its analysts value IAG at a post-pandemic high of 230p.
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Barclays (LSE:BARC) has also received City support after Shore Capital said a recent pullback for the lender’s shares had opened up an excellent buying opportunity.
The trio all produced strong results on Thursday, led by the engine maker after its sharply higher first-half operating profit of £1.15 billion beat City forecasts by 27%.
Bank of America said the figures were “far better than expected” as it increased its free cash flow estimates by between 8% and 18% for the 2024-26 period. On current trends it thinks that Rolls could be close to the bottom end of its 2027 free cash flow guidance by next year.
The bank adds that 20 times free cash flow looks a very reasonable valuation multiple for Rolls.
That’s still a discount to rivals Safran SA (EURONEXT:SAF) and GE but with upside potential should execution continue to improve and capital returns to shareholders accelerate.
Last week, Rolls said it intended to declare a payout equivalent to 30% of post-tax underlying profit when it presents February’s 2024 results.
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The support for IAG came after second-quarter profits of 1.24 billion euros (£1.1 billion) topped expectations by 15%, the only European airline to beat hopes in the three-month period.
The British Airways owner also pledged to distribute a dividend of 3 euro cents per share from 9 September, leading BoA to forecast a total for 2024 of 8 cents and a forecast yield of 4%.
The bank also lifted its full-year earnings estimate by 3% to 3.6 billion euro, underpinning the 40% upside to an unchanged price target of 230p.
It said: “We expect margins to rise to above 12% medium term, in line with guidance of 12-15%, given its track record of cost control and increasing contributions from its asset-light segments of Holidays and Loyalty.”
Barclays’ second-quarter profits also comfortably beat expectations, driven by strong performances in UK and investment banking.
The shares are up 33% year-to-date to 206.1p but have pulled back by 11% since Thursday’s results due to wider market weakness and declining sentiment on the US economy.
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A trailing price multiple of 0.6 times tangible net asset value (P/TNAV) compares with guidance for a return on tangible equity (RoTE) above 10% in 2024 and more than 12% by 2026.
Shore’s new central case for a fair value of 310p implies 48% upside and equates to a P/TNAV of 0.9 times. This is based on a sustainable RoTE of 10%.
Increasing the RoTE in line with management’s medium-term guidance to 12% would increase the fair value estimate to 370p.
Shore analyst Gary Greenwood said: “Barclays remains a significantly undervalued stock, in our view, with risk to the upside on consensus forecasts if management can deliver on its financial targets. We view the post-results pull back as an excellent opportunity to invest.”
Among other upgrades this week, analysts at Jefferies are more optimistic on British American Tobacco (LSE:BATS) after increasing their price target to 3,500p. This compares with today’s level of 2,709p.
Although recent headline half-year figures on reduced-risk products (RRP) were soft versus expectations, Jefferies believes the worst of the pressures should be behind the cigarettes and vaping products firm.
It added: “We continue to believe there is a material valuation disconnect between the market’s implied value for BAT's RRP business - we believe to be an enterprise value of $17 billion - versus what we think it is worth - about $35 billion.
“The main driver of this, in our view, is sentiment around its US RRP business. Improving trends here should therefore drive re-rating, in our view.”
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