Broker tips: Tesco, Kingfisher, Lloyds

(ShareCast News) - Tesco may be slapped with a fine of up to £500m by the Serious Fraud Office over its £326m accounting black hole, according to Cantor Fitzgerald analyst Mike Dennis. He said the SFO's findings, possible fines and trading restrictions on Tesco, after an investigation launched in 2014, are due to be announced this week.Dennis said the SFO could fine Tesco more than 1% of its UK grocery sales (£350m-plus) and force the group to repay suppliers £100m of cash payments over several years, as well as identify individuals for prosecution. "We believe, this in turn could open the way for shareholder redress."He noted that Tesco's previous auditors, PwC, said "accounting for the amount and timing of recognition of commercial income may require the exercise of judgement" or in the case of Tesco's management and accountants a lack of judgement between contractual payments and illegal demands."The point is that maybe the SFO has calculated, like we have, that Tesco UK's 'back margin' supplier allowances grew by £1.7bn over the last five years to £2.4bn by February 2014 and accounted for 30% of Tesco's total cash profit, having previously only been around 25. "£1.7bn or more is a lot of additional cash payments over a five year period of falling LFL sales volumes."Dennis said the SFO should realise the 'back margin' payments received by Tesco were probably only a fraction of the total actually demanded, meaning the scope of the fraud is far greater, covering more categories than first thought. 'Back margin' is cash provided by suppliers in return for preferential treatment in store layouts and promotions.In 2014, Tesco suspended four of its executives after the company uncovered an accounting issue that led it to overstate its half year profit guidance by £250m.Tesco's chief executive Dave Lewis said at the time that he had found out profits were overstated as a result of the "accelerated recognition of commercial income and delayed accrual of costs" - or to put it simply, the company was booking profits from suppliers before costs. Kingfisher's 'sell' rating was reiterated and its target price was put under review by Investec on Monday after the company announced a five-year transformation programme.The owner of home improvements retailer B&Q said it plans to deliver a £500m sustainable annual profit uplift by the end of the transformation programme.However, it warned that profits were likely to take a take a £50m hit in the first year of the plan and a hit of between £70m and £100m in the second year.The company, which operates Castorama and Brico Depot in France, said it also plans a capital return of £600m over the next three years - most likely via a share buyback - in addition to the annual ordinary dividend."The combined equivalent yield (capital return and ordinary dividend per share) of 5.5% is insufficient for the execution risk in our view," said Investec analyst Kate Calvert."There are a lot of moving parts and no guarantee that all the cost will fall out and the profits come through. Forecasts and target price placed under review ahead of meeting." Lloyds Bank was best placed among the UK´s High Street lenders to complete its balance sheet transformation and become a dividend growth story again, JP Morgan said in a research note sent to clients.Analyst Raul Sinha estimated that Lloyds would announce a 2015 dividend of 2.0p per share, including a special pay-out of 0.5p.That was despite the pressure on revenues which would result from a scenario of interest rates in the UK remaining "lower for longer".Indeed, following the lender´s 2015 results Sinha said investors would increasingly focus on Lloyds´s capacity for paying out dividends.He expected Lloyds to pay out a cumulative 18p per share over the period running from the fourth quarter of 2015 to 2018, an amount equivalent to 27% of its market capitalisation, while its core Tier 1 equity would improve from 13.7% to 16.0%.The shares were trading on eight times Sinha´s estimate for the bank´s earnings in 2016, sporting a dividend yield of 8.2% and offering potential upside of 34% to his revised target price of 90p (down from 98p previously) per share.Sinha reiterated his 'overweight' stance on the shares of the lender.The lower target price was due to delays in interest rate increase expectations, the impact of recent floods on its insurance arm and lower loan growth assumptions, the analyst said."We view any pull-back as a buying opportunity. Lloyds remains our top UK bank pick."