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Broker tips: Moneysupermarket, IQE, Lloyds

Wed 22 May 2019 15:02 | A A A

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(Sharecast News) - UBS has upgraded its rating on Moneysupermarket Group and boosted earnings forecasts, arguing that the price comparison site is gearing up to enter a "virtuous circle".

The Swiss broker said a three-year period of investment in back-end technology had left the front-end business "undervalued and vulnerable to competition".

But, the bank argued, "this has changed". It said the business was entering a "virtuous circle", noting: "Its engineering hub is now operating in full swing, likely boosting conversion rates and revenue growth, and Moneysupermarket has a unique opportunity to drive recurring transactions on its 13m user base, at high incremental margins.

"As conversation rates improve and user engagement initiatives come through, we now think earnings growth can accelerate to double-digit by 2020, with high single-digit revenue growth and operational leverage."

UBS has upped its rating to 'buy' from 'neutral', and increased its price target from 305p to 415p. It increased revenue estimates by 5% over 2019 to 2021, "as we have seen multiple proof points showing that product optimisation is translating into conversion gains."

Looking further ahead, UBS added that personalisation "is the big prize, which could drive +15% upside to our 2022 base case EBITDA".

Analysts at Canaccord Genuity reiterated their 'buy' rating on British semiconductor company IQE on Wednesday, noting that their expectations for the group's revenues and earnings remained unchanged despite supply chain tremors caused by last week's US ban on Huawei and Tuesday's profit warning from Lumentum.

With IQE management "tracking the situation closely" and following the temporary reprieve issued to Huawei by the White House on Tuesday, Canaccord said it was confident the situation was fluid.

"Overall management does not expect a material impact of the ban on the company," said Canaccord

"We believe IQE has negligible exposure to Huawei in photonics, while in wireless its supply relationships with both US and non-US customers should leave the company relatively agnostic to mid-to-long-term share shifts at the component and OEM level."

The Canadian broker did note that the uncertainty and short-term disruption to the smartphone supply chain caused by the ban could continue to be a factor for IQE shares short-term, but given its unchanged expectation of a significant revenue and earnings acceleration for 2019 and beyond, Canaccord stood by its 'buy' rating and 130p target price.

Bank of America-Merrill Lynch reiterated its 'underperform' recommendation for shares of Lloyds on Wednesday, pointing to a £2bn revenue headwind for the lender as it tries to manage the trade-off between growing its mortgage volumes and sustaining it net interest margin in the face of increased competition in the space and as expectations for interest rate increases continue to get pushed back.

Indeed, at £9.6bn of gross mortgage lending in the first quarter of 2019, Nationwide's 14.5% share of the market was "well ahead" of Lloyds' at 13.1%, despite the former being much smaller.

"This is no flash in the pan, with Nationwide's share of new business above its stock for three consecutive quarters," the analysts said.

"Future new business volumes will likely reflect pricing but Nationwide intends to stay competitive and consequently expects the current pace of margin decline to continue."

And other major UK banks were also continuing to target market share gains in UK mortgages, so much so that Tesco Bank had opted to pull out.

"Lloyds is likely to continue trying to mitigate the margin pressure but its weak 1Q19 lending highlights mortgage borrowers' price sensitivity.

"We estimate that this results in a £2bn income headwind 2018-21E that is hard to fully offset with growth in other parts of the balance sheet."

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