RBC Capital downgrades St James's Place, slashes price target

22nd Mar 2024 09:21

(Sharecast News) - RBC Capital Markets downgraded St James's Place on Friday to 'sector perform' from 'outperform' and slashed the price target to 500p from 900p.

The bank said news of a £426m complaints provision has added further uncertainty to an investment case that was already complicated by anticipated declining earnings over FY24-FY26.

"Whilst the share price response (down 30% post results) and current valuation (7.3x FY25E P/E) bake in a pessimistic view on the group's prospects, we now expect clarity over risks (and unwind of observed discount) to develop over a multi-year horizon," it said.

"On a 12-month view there is scope for further mixed news flow. The tricky asset gathering backdrop, uncertainty around the flow of complaints and potential exit from the FTSE 100 are notable risks (all outside of the new CEO's control), whilst we believe the outcome of a strategic review at H1 results could be received positively."

RBC said that with the shares now trading at a 33% discount to peer average on FY25E P/E basis, simplistically the market is now arguably implicitly pricing in a circa 48% EPS dilution event.

"Whilst the company hasn't given any indication of a need for capital injection, we see future risks in this respect as increased following the historical advice delivery matter, where it is impossible to rule out future provision strengthening.

"We note that whilst the group is extremely well capitalised, the liquidity position centrally appears more constrained, with a £295m available revolving credit facility acting as a buffer."

RBC said patience now looks likely to be key to performance.

The bank said it's impressed by new chief executive Mark Fitzpatrick, who it believes is repositioning the business to adopt a sustainable position as market leader in a more tightly regulated UK wealth market.

"We continue to see an attractive long-term future for the group and believe the resilience and attraction of the SJP partnership model are underestimated by the market," it said.

"Given the strong growth in cash profit expected after FY26, we can envisage the group eventually regaining and maintaining its premium valuation to peers, and see an opportunity in the shares currently for those that are able to take a long-term view.

"The discounted valuation, but attractive long-term prospects, means we see elevated near-term risk of the group emerging as an M&A target."