HSBC Holdings PLC

HSBC Holdings PLC (HSBA) is a London, the United Kingdom-based group, which provides banking and financial services worldwide. It offers various banking products and business operations are spread across Asia, Europe, Middle East, North Africa, North America and Latin America. The company is divided into four segments: Global Private Banking (GPB), Commercial Banking (CMB), Retail Banking & Wealth Management (RBWM), and Global Banking & Markets (GB&M).

Recent News
On 5^th August 2019,the company announced that John Flint has stepped down as Group Chief Executive and as a Director by mutual agreement with the Board.

Financial Highlights (H1 FY19, US$ million)

(Source: Interim Reports, Company Website)

The company’s reported profit before tax increased by 15.8 per cent to $12.4 billion as compared to $10.7 billion in H1 2018. Adjusted profit before tax surged from $11.7 billion in H1 FY18 to $12.5 billion in H1 FY19. Reported profit after tax was up by 18.1 per cent to $9.9 billion against the $8.4 billion in the half-year of the Financial year 2018.

Reported revenue rose by 7.6 per cent and adjusted revenue climbed by 8 per cent, due to an increase in RBWM and CMB. Adjusted revenue was down by 3 per cent in GB&M, which suffered from lower market activity driven by the ongoing economic uncertainty and spread compression.  Investments stood at $2.2 billion in H1 2019, an increase of 17 per cent as compared with H1 2018 data.

Basic and diluted earnings per share increased by 16.67 per cent to $0.42 as compared with the H1 2018 of $0.36. Returns on average tangible equity surged by 150 bps to 11.2 per cent against the 9.7 per cent in H1 FY18. The Net Interest Margin decreased from 1.66 per cent in H1 2018 to 1.61 per cent in H1 2019. Common equity tier 1 ratio surged by 30bps to 14.3 per cent as compared to 14% recorded in FY18. An interim dividend per share was $0.31. The company intend to initiate a share buy-back programme of up to $1 billion.

Share Price Performance

Daily Chart as at August-14-19, before the market closed (Source: Thomson Reuters)

On 14th August 2019, at the time of writing (before the market close, GMT 12:40 PM), HSBC Holdings PLC shares were trading at GBX 604.50 and decreased by 1.60% against the previous day closing price. Stock's 52-week High and Low prices are  GBX 719.44/GBX 596.40. The company’s stock beta was 0.99, reflecting almost the same movement in the stock as compared to the benchmark index.

Valuation Methodology

*Peers: Lloyds Banking Group PLC, Barclays PLC, Royal Bank of Scotland Group PLC, Charter Court Financial Services Group, OneSavings Bank PLC, Standard Chartered PLC, and Close Brothers Group PLC.

Conclusion
The company is gearing up for the UK’s exit from the EU and to provide continuity of services to all the clients based in the UK and Europe. The company will stay alert to the downside risks to shareholders interests particularly with respect to international trade tensions and future movement of loan costs.

In the US dollar bloc, interest rates are now projected to decrease rather than increase, and geopolitical issues could affect a substantial number of main markets. In the short-term period, the impact of the United Kingdom’s leaving from the EU (European Union) remains very uncertain given the prevailing prospects for revenue and interest rate headwinds in RBWM and GB&M.

The company expects some recovery in GB&M segment in the H2 of FY19 and into next year and targets a RoTE more than 11 per cent in 2020.The company said that it would not take short-term decisions that could risk the long-term health of the business.

The rising interest rate can help the company to improve its margins but can reduce the demand for loan. The company must remain alert and pursue a proactive approach to managing the cost base. The company will have to remain watchful of political and economic uncertainties around the world. Digital transformation, the emergence of Fintech, growing cards and payments channel in the UK, and expansion initiatives in China may offer new growth opportunities.

Based on the decent fundamental performance and keeping in mind the potential headwinds we have given a “Hold” rating at the closing price of GBX 602.20 (as on 14th August 2019) based on 0.86x NTM Price/Book Value (approx.) on FY19E book value per share (approx.)

Jupiter Fund Management PLC

Jupiter Fund Management Plc (JUP) is a financial service provider that offers management of medium- and long-term investments. The company provides management of equity investments for retail, institutional and private client investors.
On 11^th October 2019, the company will announce the third-quarter trading update for the financial year 2019.

Financial Highlights (H1 FY19, £)

(Source: Interim Reports, Company Website)

AUM (assets under management) stood at £45.9 billion, an increase from the £42.7 million in FY2018. The majority of this improvement had been driven by the gains from investment performance of £4.3 billion and market movements. Net outflows decreased to £1.1 billionas compared with the corresponding period of the last year. Net management fees decreased by 8 per cent to £182.9 millionagainst the £199.2 million in H1 FY18, due to lower average AUM as a result of 2018 outflows and negative market movements. Profit before tax reduced by 16 per cent to £81.4 millionagainst the same period in 2018, due to lower revenues from lower average AUM. Basic earnings per share stood at 15.1 pence, a decrease of 13 per cent from the corresponding prior-year period. Interim dividend per share was 7.9 pence and remained flat against the same period last year. Operating margin, before exceptional items, increased by 2 per cent to 47 per cent as compared with the corresponding period of the last year.

Share Price Performance

Daily Chart as at August-14-19, before the market closed (Source: Thomson Reuters)

On 14th August 2019, at the time of writing (before the market close, GMT 12:30 PM), Jupiter Fund Management PLC shares were trading at GBX 334.20 and a decreased by 0.98% against the previous day’s closing price. Stock's 52 weeks High and Low is GBX 435/GBX 265.54. The company’s stock beta was 1.39, reflecting the higher movement of the stock as compared to the benchmark index.

Valuation Methodology

*Peers: Man Group PLC, Rathbone Brothers PLC, Standard Life Aberdeen PLC, Intermediate Capital Group PLC, and Provident Financial PLC.

Conclusion
The company faces the several riskssuch as Failure to deliver strategy; Ability to attract and retain critical staff; Ineffective product, client and geographic diversification; Sustained market decline; Challenges presented by Brexit; Operational control environment; Failure of a critical outsource partner; and Cybercrime.

Mr Andrew Formica’s appointment as the Chief Executive Officer was announced in January following a year during which Jupiter suffered heavy outflows from its flagship bond fund and its share price halved.

Mutual funds saw £1.6 billion of outflows, including £0.5 billion from one mandate which switched to a segregated mandate.  Flows in Dynamic and Segregated Bond funds appear to be flat-to-positive after several quarters of outflow.

Although the company’s profitability margins decreased only slightly in the latest period, the business environment does not augur well for its performance. The geopolitical and economic uncertainties in the United Kingdom as well as abroad has caused significant volatility in the market. The Brexit implication, stiff competition, and operational risks may affect the growth of the company.

The company has a decent capital positionwhich supports its dividend pay-out and business policies. The company expects to continue progression on cost reduction, but not at the expense of investments, which could finally deliver higher returns to the investors. Delivering growth through investment excellence remains the priority. The company looks to achieve this through the active, high-conviction approach and its client-centric culture.

On the basis of risk elements as discussed above and supported by valuation done using the above method, we recommend investors to keep a “Watch” on the stock at the closing price of GBX 334.60 (as on 14th August 2019), while we look for any upcoming catalysts.
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.
*Currency exchange rate taken for 1 USD = 0.829150 GBP.

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