Lloyds Banking Group Plc - Resilient Business Model in a Challenging Economic Environment

Lloyds Banking Group Plc (LON: LLOY) is a FTSE 100 listed banking company, which is engaged in the business of financial and banking services.

On 30^th July 2020, the Group will announce its half-year results for 2020.

Recent Developments
On 22nd May 2020, the Group updated the market on its decision in respect of the contractual option to call its EUR 750 million 6.375 per cent AT1 (Additional Tier 1) perpetual bonds.

AGM Statement
On 21^st May 2020, the Group held its Annual General Meeting. The Company’s main purpose is to Help Britain Prosper, and this commitment is currently more important than ever. The Group’s Board, along with its rivals, agreed to cancel the 2019 final dividend in order to provide assurance that the banking industry, through the existing crisis, had the capital it needed to support households and businesses. LLOY announced the acquisition of Tesco Bank's GBP 3.7 billion prime residential mortgage portfolio and accomplished the integration of MBNA. LLOY has a robust balance sheet with strong capital and liquidity position. Also, the Company committed not to declare share buybacks or ordinary dividends until the end of 2020.

Share Price Performance

1-Year Chart as at June-24-2020, before the market close (Source: Refinitiv, Thomson Reuters)

Lloyds Banking Group Plc’s shares were trading at GBX 32.83 on 24th June 2020 (before the market close at 8:25 AM GMT+1), which was up by 0.27% against the last day closing price. Stock 52 weeks High and Low are GBX 73.66/GBX 27.12.

From the technical standpoint, shares were trading flat as compared to short-term support level of 20-day simple moving average price.

Valuation Methodology
 
 

Valuation Metrics

(Source: LSE)

As on 29^th May 2020, the Price to Book multiple of the LLOY was 0.4x and the same multiple was lower as compared with the Banks industry. It is reflecting that the Company is trading at a lower multiple as compared to its peers.

Growth Catalysts and Risk Factors
The bank’s common equity tier 1 ratio (a key measure of a bank’s financial strength) was 14.2 per cent at 31^st March 2020versus 13.9 per cent a year ago, despite risk-weighted assets rising from GBP 208 billion to GBP 209 billion. The trading surplus remained strong with GBP 1,988 million in Q1 FY20 and showed an increase of 7 per cent versus Q4 FY2019. In 2019, LLOY delivered a solid financial performance with returns and market-leading efficiency. The economic outlook is clearly challenging with the mitigating impact of Government measures in the UK and the longer-term outcome dependent on the severity and length of the pandemic.

Conclusion
The impact of lower rates, higher impairment and lower levels of activity on the Group’s business will continue into the second quarter of 2020. The Group is supporting its customers from retail, commercial and small business through Government-funded schemes like CCFF (Covid Corporate Financing Facility) and CBILS (Coronavirus Business Interruption Loan Scheme).Moreover, the Group stays on-track to continue to assist its clients, Help Britain Prosper and provide long-term sustainable success.

Based on the decent prospects, which are supported by valuation done using the above method, we have given a “Buy” recommendation at the current price of GBX 32.48 (as on 24th June 2020, before the market close at 8:00 AM GMT+1), with lower double-digit upside potential based 0.62x NTM Price/Book Value (approx.) on FY20E book value per share (approx.).

 S&U PLC - 20th Consecutive Year of Increase in Profits from Motor Finance Segment Capabilities

S&U Plc (LON: SUS) is a United Kingdom-based company, which provides credit facility and financing of motorised vehicles. The Company is gradually capturing market share and positioning itself in the property market.

Update on Trading Performance and AGM Statement
On 9^th June 2020, S&U released an update on the trading performance for the period from 1^st February 2020 to 8^th June 2020. Earlier on 8^th April 2020, the Group withdrew its future guidance due to outbreak of covid-19. The Group is focused on ensuring the health and safety of its employees and have enabled remote access to support business continuity. SUS is not dependent on the support of the government. The Group’s sales from Advance finance declined by 15 per cent from normal level due to closed broker introducers and car dealers. Based on the uncertainties in the labour market, SUS has restricted the categories of the customer for approval. Driven by re-opening of car sales outlets, the transactions have recovered to around 40 per cent of normal. The collections business has also been impacted by the lower consumer confidence and measures taken by FCA. The Group’s operational sustainability is reflected in strong treasury position. The borrowings fall to GBP 98 million with 55 per cent gearing. SUS has repaid facilities of GBP 25 million and reduced financing costs.

Share Price Performance

Daily Chart as of June 24^th, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

S&U Plc shares were trading at GBX 1,695.00 at the time of writing before the market close (at 10:02 AM GMT+1) on 24^th June 2020 and were up by 2.73% versus the previous day closing price. Stock's 52 weeks High is GBX 2,500.00 and Low is GBX 1,420.00.

From the technical standpoint, shares were trading well above the short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology
 

Growth Catalysts & Key Risks
In Group cash flow, it has continued motor book growth in advances and collections, and steady growth in Aspen in slower property bridging market. In Aspen, the Group witnessed solid profits growth despite an uninspiring property market. The ongoing outbreak of Coronavirus could impact the company’s performance in the near term.

Conclusion
In recent trading, the Group has witnessed a decline in the business performance due to the outbreak of covid-19. But with the reopening of car sales stores, the Company’s transactions are gradually returning to normal levels. SUS has astrong treasury position and is not dependent on government support during the pandemic. The company has delivered growth in top-line and bottom-line performance for the financial year 2020. Although the COVID-19 crisis presents unprecedented challenges, the group has strong financial foundations and 80 years of rich experience, which makes them well placed to meet all the challenges.

Over the course of 4 years (FY16 – FY20), the company’s revenue surged from GBP 45.2 million in FY16 to GBP 89.90 million in FY20. Compounded annual growth rate (CAGR) stood at 18.76 per cent.

Based on the decent fundamental prospects and supported by valuation as done using the above method, we have given a "Speculative Buy" recommendation at the current price of GBX 1,695 (as on 24^th June 2020, before the market close at 10:02 AM GMT+1) with single-digit upside potential based on 7.35x NTM Price/Earnings multiple (approx.) on FY21E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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