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Shares of Lloyds Banking Group continue to be overshadowed by the prospect of full nationalisation following its takeover of rival HBOS. But Citigroup reckons that is the last thing the Government wants, and clients should consider taking advantage of the cheaper share price.
It has resumed coverage of the lender with a high-risk buy rating and a 120p target. The shares responded with a jump of 27.9p, or almost 42%, to 95p. Citi believes the danger of dilution has been exaggerated: “If the Government provided 100% of the required capital under our stress-test scenario, public ownership would increase from 43% to 57% and dilute the net asset value to 122p a share.
“Lloyds is currently trading at a 47% discount to this outcome, seemingly reflecting fears of full nationalisation, something we view as unnecessary and inconsistent with the stated aims of the Government.”
The broker concedes nationalisation remains a possibility, but remains adamant the risk is more than adequately discounted in the current valuation.
Banks generally were able to extend this week's rally. Barclays gained 18.8p to 108.8p and Royal Bank of Scotland added 3.8p to 19.5p. It was part of a global banking revival, supported by the US Government's plans to absorb toxic bank assets. Deutsche Bank led the charge in Europe while Mitsubishi UFJ Financial made gains in Japan .
The life assurers continue to attract support, with Aviva jumping 31p to 324¼p, Prudential 29¼p to 341¾p and Legal & General 7.3p to 68.2p.
Property developers Land Securities and British Land were chased up on news they are to sell shopping-centre stakes valued at more than £750 million. LandSecs rose 22p to 656p and British Land 29¼p to 460¼p. Goldman Sachs indicated only yesterday that they would soon have to make disposals to reduce debts and cope with the recession. But it added that such a move would dilute earnings, and hit shareholders.
The rest of the London market reacted positively to news that President Obama wants to boost America's economic stimulus package to almost $900 billion (£630 billion). Leading shares were squeezed higher with the FTSE 100 index rising 101.06 to 4295.47.
Rio Tinto lost 44p to 1595p after conceding that it may have to turn to shareholders for extra funds to meet its goal of reducing debt by $10 billion before the year-end. Hot gossip says it will raise up to £8 billion by way of a three-for-five issue at 900p. This may be underwritten by the China Development Bank, which could invest a further $20 billion. Aluminium Corp of China paid 7000p a share (£7 billion) for an 11% stake in Rio last year.
Dealers say other rights issues by mining companies are on the way. Xstrata, down 44p at 641p, may hit the market as early as tomorrow with an issue priced at 400p. It needs the money to repay debt of about £11 billion. It will also need the backing of 35% shareholder Glencore International to get this one away. If Glencore does not back the issue, it faces substantial dilution of its holding. BHP Billiton climbed 55p to 1319p despite Citigroup dropping the shares from its buy list.
The market had to digest a clutch of fundraising exercises today. Durex maker SSL dropped back 13¼p to 47½p as Cazenove and Credit Suisse began a bookbuilding exercise to place 19.19 million shares. The company hopes to raise £90 million with which to expand.
Chaucer Holdings dipped 2¾p to 44¼p after unveiling plans to raise £75 million through a placing of 17.2 million shares and an open offer of 182.7 million shares at 40p. The proceeds will be used to pay off debt.
Speculative buying drove Chloride 23¼p higher to 147¼p. The group, which these days specialises in secure power systems, was the subject of a 255p-a-share offer from American company Emerson in last June. Gossip suggests Emerson may be ready to have another crack at Chloride.
