Traditional British banking stalwart Lloyds (LSE: LLOY) (NYSE: LYG.US) and fast fashion e-tailer Boohoo (LSE: BOO) are very different companies. However, the long-established FTSE 100 giant and the youthful AIM-listed small cap do have one thing in common. And it could be a catalyst for sending their shares marching higher in the next 12 months.
Lloyds
Lloyds’ recovery from the financial crisis continues apace. Indeed, the Black Horse will shortly gallop past its remaining legacy issues.
Earlier this year, Lloyds declared its first dividend since payouts were halted in 2008, and Q1 results in May showed a business on the road to full health. Key capital and operating ratios were strong and improving, as was return on equity — putting the bank well ahead of its Footsie rivals.
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The table below shows some key valuation measures for Lloyds at a current share price of 85p.
| P/TNAV | 1.5x |
| P/E (forward 12-month) | 10.3x |
| Dividend yield (forward 12-month) | 4.1% |
Lloyds P/TNAV (price-to-tangible net asset value) of 1.5x is high relative to the other big UK banks, but could still rate higher — realistically, up to about 2x, which would imply a share price of 112p. Similarly, if Lloyds’ P/E (price-to-earnings) ratio of 10.3x was in line with the long-term FTSE 100 forward average of 14x — which is arguably merited — it would imply a share price of 116p.
So, there appears to be scope for Lloyds’ shares to move up to around the 112p-116p area. The catalyst for this to happen could be the removal of a “stock overhang” — that’s to say, the completion of the sale of the government’s shares in the bank. With the government having sold its stake down from about 24% to 16% over the first six months of this year, further sales to continue through to December, and a commitment to a retail offering within 12 months, the end of the stock overhang is in sight. Lloyds shares could move up strongly when this scenario plays out.
Boohoo
A stock overhang also appears to be holding back Boohoo’s shares at the moment — and I believe the upside potential is even higher than for Lloyds. Boohoo was floated at 50p a share in March 2014. However, after a profit warning on 7 January this year there was immediate heavy selling, notably by some major institutional shareholders, sending the shares plunging.
Boohoo’s biggest institutional backer, Old Mutual, reduced its stake to 10.44%, while BlackRock went “below 5%” and Odey down to 3.93%. Results in May and a Q1 trading update last month strongly suggest Boohoo’s performance last winter was no more than a hiccup, but the shares have remained depressed. They currently trade at around 27p.
Old Mutual has continued to sell since January, with the market having been notified of reductions in its stake to 9.83% (on 11 May) and 7.84% (on 12 June). Boohoo’s corporate website currently shows major shareholders at 15 June, and has Old Mutual down to 7.74% and Odey at 3.23% (down from the 3.93% notified in January).
Boohoo trades on a forward P/E of 25 with forecast earnings growth of 43%, giving a cheap P/E-to-earnings growth (PEG) ratio of 0.6. I see no reason why Boohoo shouldn’t be trading at a fair-value PEG of 1, which would imply a share price of around 45p.
Boohoo looks a great buy to me at the current level, because I expect the shares to appreciate rapidly once the institutions have finished their selling. And Boohoo could bring that day forward, because at last week’s AGM shareholders gave management authorisation to buy back up to 10% of the company’s shares.
