Thursday 4th July 2013
Post last Friday’s (28th June) announcement that UK Financial Investments Ltd has invited banks to apply to manage the sale of the UK Government’s holdings, I've bought quite heavily into Lloyds (LLOY, mkt cap £46bn) at up to 64p/shr.
The UK Government has 39% of LLOY to offload, with a break-even level at 61.2p/shr (this price accounts for the fees already paid by the bank to the authorities for State guarantees). Therefore I reckon the placing gets done at 62p+/shr. There must be no prospect of the UK Government taking a loss and the political/press fallout as a result. This is not a fund raise, it is a placing and the UK Government can afford to wait if needs be. Not that I think it will have to. There is a reason why LLOY was the FTSE’s best performer in 2012 ...
- Well capitalised: LLOY’s management has upgraded its core tier 1 ratio target from greater than 9% by FY2013 and 10% by FY2014 to 10% by FY2013. That makes shareholder returns more likely sooner rather than later.
- Potential significant shareholder returns: LLOY’s could be capable of returning up to £10bn to shareholders via dividends and share buy backs over the next two years. That would be equivalent to 20%+ of its current market cap. Bloomberg consensus has a cumulative £8.65bn of net income projected for 2014-15. A 35% payout ratio would equate to over £3bn in dividends. Further, any excess capital above management’s 10.5% target, could pave the way for material share buy backs.
- UK economy appears to be improving: The UK house builders continue to report improved trading and outlooks, while the UK Services PMI has reported its highest measure in over two years. That's likely to improve LLOY’s outlook for net interest margins and capital ratio; the latter supporting share buy backs.
I expect high demand for the UK Government’s stake in LLOY. Sovereign Wealth Funds (SWFs) will likely hoover up all they can get in a placing of a well capitalised bank, active in an oligopolistic market, in an improving economy and with considerable shareholder returns on offer. Further, SWFs are not the type looking for quick turns. They will take a stake and sit on it for years. As soon as the free float is up, then tracker funds will also have to start buying. In short, I would expect buying pressure to overwhelm selling.
Finally, this placing is a big juicy ticket for the Investment Banks. They will be keen to get this done well and demonstrate an ability to do RBS next. No sensible analyst will jeopardize being on the juicy tickets with a SELL note.
Ps. The chart also looks like it’s on the verge of breaking out.
|Lloyds share price|
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