Broker tips: Dowlais, Close Brothers

16th Feb 2024 16:08

(Sharecast News) - Barclays initiated coverage of Dowlais on Friday with an 'overweight' rating and a 110.0p price target.

"We believe that Dowlais 'ticks the right boxes', screening strongly against several key criteria that we expect investors to look for in 2024 in the EU Supplier space, including strong earnings momentum, an attractive powertrain story, and possible corporate actions," the bank said.

Automotive engineer Dowlais was spun off from Melrose Industries in April 2023 so that it could concentrate on the GKN Aerospace business.

Berenberg slashed its price target on Close Brothers to 425.0p from 1,100.0p on Friday as it cut estimates after the merchant bank announced it was scrapping its dividend amid a regulator probe into car financing.

The Financial Conduct Authority said last month that it would investigate commission on historic car financing deals. The probe will look at deals going back a decade, on concerns that lenders and dealers were incentivised to increase interest rates for customers.

Close Brothers said on Thursday that there was "significant uncertainty about the outcome of the FCA's review, and the timing, scope and quantum of any potential financial impact on the group cannot be reliably estimated at present".

"Uncertain costs related to the FCA's review of motor finance led the company to announce on 15 February that it would not pay a dividend during FY 2024, to ensure capital strength," said Berenberg, which now assumes consumer redress of £250.0m during FY25. "Our estimates now include a material charge for potential redress, as well as higher expenses and a retrenchment from motor and premium finance lending (circa 30% of loans)."

Berenberg said its new price target was based on conservative earnings and a 20% cost of equity.

The German bank maintained its 'buy' rating on the shares but conceded that even the 40% upside implied by the price target may be insufficient to compensate some investors for the risk of potential regulatory actions.