Shawbrook Group PLC (LSE:SHAW) shares are undervalued despite the specialist lenders offering some of the strongest growth prospects among UK challenger banks, according to RBC Capital Markets.
Investors have become overly pessimistic about the buy-to-let lending sector amidst the UK's political uncertainty, RBC said, leaving specialist lenders trading at their lowest relative valuations in a decade despite generating some of the highest returns in European banking.
Shawbrook is viewed by the investment bank as well placed to benefit from resilient demand for professional buy-to-let mortgages, arguing landlords were likely to pass higher costs on to tenants in a market where demand continued to exceed supply.
Shawbrook shares trade at about 0.85 times forward tangible book value and 5.8 times forward earnings, around 9% below their IPO price and roughly 35% below their peak, RBC said, initiating coverage with an ''outperform' rating and 475p price target.
The broker argued the market was underestimating the bank's growth potential, highlighting its track record of acquisitions.
With Shawbrook having completed about 25 transactions over the past 15 years, RBC has built further acquisitions into its forecasts, expecting them to add about £300 million of loans a year and lift earnings per share by around 2% by 2028.
RBC also dismissed speculation that Shawbrook could bid for rival Aldermore, saying such a deal would deliver attractive earnings accretion but relatively weak returns on investment.
Shawbrook's technology was also highlighted, with testing by analysts finding that the bank offered the quickest and easiest savings account opening process among UK specialist lenders.
