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Share watch.

High street banking giant HBOS is performing well in what is proving to be a stable UK banking environment.

Its multi-brand strategy in UK retail banking and insurance continues to deliver strong growth while corporate banking is proving a bit more difficult to turn around.

While these areas provide the bulk of revenues, HBOS is also expanding into certain areas of the Irish and Australian banking markets to provide the longer-term growth opportunities that it needs.

On a valuation basis, shares do not look particularly expensive and are at a modest discount to the current banking sector multiple, once we exclude the more highly-valued Asian banks. Gerrard Investment Management estimate a fair value of 1040p based on our target sector forecast of 10 times earnings per share next year.

Its recent share price under-performance, despite strong operating results and a fundamentally good outlook, provides a reasonable entry point.

However, we expect a small discount to peers will continue to impact its rating, as investors continue to expect corporate activity over the medium term.

A shift in strategy, which has seen BSkyB start to focus on bolt-on acquisitions and higher investment as a way to defend its market position, has left the market uncertain over the group's long-term growth prospects. It is our belief that the move into the triple play market should be viewed positively and we still back the long-term growth story, with BSkyB set to remain as the dominant player in the UK pay television market and become a force in broadband.

Our discounted cashflow valuation is based on this assumption and derives a long-term fair value of 640p.

On the dividend discount model, Sky ranks top quintile globally and second quintile on a regional basis.

We, therefore, view the shares as undervalued and we maintain the outperform recommendation.

In the short term, Sky has cleared the hurdle of retaining the majority of the English Premiership football rights.

We now look for the company to establish a trend of beating forecasts again before the shares progress towards our fair value. We recommend Reckitt Benckiser as we believe the current share price does not reflect the company's growth prospects.

RB's growth rate is expected to stay robust over the next few years, with organic growth supported by the recent acquisition of Boots Healthcare Inter- national (BHI).

Volume growth will remain strong, backed by the innovation programme and with continued focus on the power brands.

Andrew Miller is regional centre head of Gerrard Investment Management in Newcastle
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Title Annotation:Business
Publication:The Journal (Newcastle, England)
Date:May 30, 2006
Words:417
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