About the author:
- Author name:
- By Azib Khan
- Job title:
- Former Senior Analyst
- Date posted:
- 25 November 2016, 10:58 AM
- Sectors Covered:
- CYB has reported FY16 underlying NPAT of £143m, 18% higher than our forecast of £121m. However, the beat is due to an unusually low credit impairment charge in 2H16 as well as a lower effective tax rate in 2H16.
- As expected, CYB's outlook for FY17 and medium-term targets are unchanged from the Capital Markets Day. There was also nothing new on the IRB accreditation front.
- We believe the stock remains overvalued, particularly as a result of the recent 'High Court rally'.
Exceptionally low credit impairment charge in 2H16
CYB has reported a credit impairment charge of only £8m for 2H16. This compares with a charge of £31m in 1H16 and £78m in FY15. The company has said that the FY16 charge of £39m is the lowest on record since the merger of Clydesdale Bank and Yorkshire Bank in 2004. We do not believe the exceptionally low 2H16 charge can be sustained and we are cautious about the outlook for asset quality as discussed inside.
Statutory NPAT worse than expected
CYB has reported a statutory loss of £164m in FY16, compared with our forecast for a profit of £30m. The main reason for the worse-than-expected outcome was the de-recognition of tax losses valued at £237m following changes to tax legislation enacted in September 2016.
Positive jaws achieved courtesy of 'below the line' expenses
On an underlying basis, income growth was 3% from FY15 to FY16, whilst expense growth was zero. However, underlying expense growth benefited from the taking of a £45m restructuring charge and a £45 impairment of capitalised software below the line. If these two items were included in underlying expenses, then underlying expense growth would have been 13% from FY15 to FY16. On the capitalised software front, based on the rate of amortisation in FY16, we calculate that the average software amortisation period for CYB is almost 7 years. This period of time is (unsurprisingly) broadly consistent with NAB's average software amortisation period. NAB has the longest such period of the Australian major banks. As a result of CYB's lengthy average amortisation period, we see scope for further impairment of capitalised software.
Investment view and changes to forecasts
We have increased our underlying EPS forecast by 3.2% in FY17 largely due to a lower credit impairment charge. However we have increased our credit impairment change forecast in FY19 and FY20, which has resulted in underlying EPS reductions of 1.5% in FY19 and 2.2% in FY20. Our target price for the ASX-listed Chess Depository Interests (CDIs) is unchanged based on an AUD/GBP cross-rate assumption 0.60.
We believe the High Court decision earlier this month, which requires the British Government to obtain approval from parliament to trigger Brexit, has resulted in over-optimism being factored into CYB's share price. Our base case is that a 'hard' Brexit will eventuate and we therefore do not expect the 'High Court rally' to be sustained.
We retain our Reduce recommendation.
Morgans clients can login to view our detailed report and share price target for CYBG PLC (CYB). Alternatively, please contact your nearest Morgans office for access.
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.