November 24, 2009

Lloyds Banking Group (Buy, TP=160.0p) - Corporate news Now for the rights issue (2p)

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Lloyds Banking Group (Buy, TP=160.0p) - Corporate news Now for the rights issue (2p)
Having announced a successful debt exchange offer yesterday, Lloyds published details of the rights issue this morning to be submitted to the co's shareholders meeting on Thursday.
The capital raising plan –
The innovative £22bn capital raising plan has two stages. First, a £7.5-9bn debt exchange offer to convert into contingent convertibles (CoCos), and, second, a £13.5bn equity rights issue. The debt conversion was a success – attracting demand for conversion of £12.5bn, significantly above the £7.5bn target.
Terms of the rights issue –
Lloyds is raising £13.5bn at a subscription price of 37p, an exchange ratio of 1.34, or c. 4 new shares for every 3 held. Based on a closing price of 91.5p yesterday, this represents a 39% discount to a theoretical ex-rights price of 60p. The discount is deep compared to recent deals, but Lloyds specified a discount range of 38%-42% in the prospectus so this is at the lower end, indicating a decent level of management confidence.
Operating trends –
The prospectus shows key operating trends are all improving: Q3 group impairment charge was 22% below the H1 run-rate, with Lloyds reiterating that H1 09 was the peak; margin is stabilising in a ‘vastly improved wholesale funding market; EU is imposing relatively lenient measures and any revenues foregone should be more than offset by cost synergies of £1.5bn, which Lloyds flagged are currently running ahead of its initial target.
Investment case and valuation –
In conclusion, in view of the rights issue terms and operating trends, we estimate pro-forma normalised earnings of £7.5bn, EPS of c. 12p and NAV per share of 75p is achievable by 2013 (assuming 66bn shares in issue post rights). The announcement this morning removed the last piece of uncertainty for Lloyds, in our view. Implicit multiples of 5x earnings and 0.8x tangible book against the TERP (2013e) look undemanding for a bank showing improving trends and decreasing reliance on the UK government. Our current pre-rights TP is 160p; arithmetically implying 100-105p post rights.

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