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The Expert View: RBS, BT and HSBC

Our daily roundup of analyst commentary on shares, also including Berkeley and Euromoney.

by Daniel Grote on Oct 31, 2017 at 05:00

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Key stats
Market capitalisation£33,911m
No. of shares out11,905m
No. of shares floating3,520m
No. of common shareholdersnot stated
No. of employees73600
Trading volume (10 day avg.)16m
Profit before tax£6,353m
Earnings per share-59.49p
Cashflow per share-50.66p
Cash per share774.14p

Berenberg hopeful on RBS dividends

Investors are starting to see Royal Bank of Scotland (RBS) in a new light after three quarters of profitability, but that market consensus is failing to appreciate its cost-cutting delivery, according to Berenberg.

‘Management is delivering on its promises; cutting costs aggressively while growing the core business,’ said analyst Peter Richardson.

‘Despite this, consensus fails to reflect RBS’s cost targets. By contrast, we believe RBS can get close to its £6.4 billion target cost base one year early.’

Richardson also believes the bank can return to paying dividends in 2018, with 35p of excess capital per share set to be distributed.

Richardson rates the shares a ‘buy’ with a 300p target price. The shares edged 1.6p lower to 284.2p yesterday.

‘With RBS trading on 10.2 times our 2018 estimated earnings per share for the core bank, we believe this excess capital remains undervalued,’ he said.

Key stats
Market capitalisation£26,081m
No. of shares out9,918m
No. of shares floating8,353m
No. of common shareholdersnot stated
No. of employees106400
Trading volume (10 day avg.)19m
Profit before tax£7,707m
Earnings per share19.09p
Cashflow per share54.83p
Cash per share20.56p

UBS sees pension upside at BT

UBS believes there is up to 40p per share upside from a potential reduction in BT’s (BT) pension deficit, which stood at £9.1 billion at the end of June, according to the IAS19 accounting measure.

Analyst Polo Tang estimated that figure could now have fallen to £8.4 billion, explaining that every 10 basis points increase in yield reduced the deficit by up to £800 million, with a corresponding increase in inflation raising it by up to £700 million.

A much bigger reduction could come from a change in the mortality tables used to calculate the deficit, which helped to reduce the pension liabilities at supermarket Tesco.

‘Applying the new tables to the BT pension scheme could reduce the actuarial deficit at BT by £3 billion… and would theoretically add 30p to the valuation for BT. However, this change would require the agreement of the BT pension trustees and could be offset by more prudent assumptions elsewhere,’ he said.

A further £1 billion reduction in the deficit would come from a court victory in BT’s legal big to change the terms for a minority of members from linkage to consumer price inflation from the higher retail price inflation.

Tang has a ‘neutral’ rating and a 310p target price on the shares, which were flat at 262.8p yesterday.

Key stats
Market capitalisation£147,449m
No. of shares out20,024m
No. of shares floating19,957m
No. of common shareholdersnot stated
No. of employees232957
Trading volume (10 day avg.)22m
Turnover32,311m USD
Profit before tax9,960m USD
Earnings per share0.05 USD
Cashflow per share0.21 USD
Cash per share8.48 USD

HSBC profit jump isn’t all it seems

Investors looked through a seemingly blockbuster set of results from HSBC (HSBA) to send the shares 1.6% lower to 736.1p yesterday.

While the bank reported a five-fold increase in profits to $4.6 billion (£3.5 billion) in the third quarter, adjusted profit figures, factoring in the sale of its Brazilian business and some accounting changes, fell 1%.

‘The headline growth seen by HSBC over the last year is heavily skewed by the sale of its Brazilian operations in 2016, so the adjusted numbers give us a much better idea of what’s going on underneath the bonnet,’ said Laith Khalaf, senior analyst at Hargreaves Lansdown.

Khalaf said a weak showing in investment banking had offset progress in the retail and commercial banking divisions. ‘However this is against a backdrop of a market-wide downturn in fixed income trading, and actually HSBC has held up better than many of its competitors,’ he said.

‘Regionally it’s Asia which is doing the heavy lifting for HSBC, and while the bank is headquartered in the UK and the second largest company in the FTSE 100, its business primarily resides in the Far East. The fortunes of HSBC are therefore largely tied up in the Asian growth story, for better or worse.’

Key stats
Market capitalisation£5,047m
No. of shares out135m
No. of shares floating129m
No. of common shareholdersnot stated
No. of employees2443
Trading volume (10 day avg.)1m
Profit before tax£759m
Earnings per share451.44p
Cashflow per share453.39p
Cash per share425.08p

Barclays turns bearish on builders

Barclays has downgraded its rating on Berkeley (BKGH) as it shifted to a more bearish stance on the house building sector.

Shares in Berkeley fell 53p to £37.36 yesterday as analyst Jon Bell cut his rating to ‘underweight’ from ‘equal weight’, retaining his £36.28 target price.

Bell argued the house building rally this year was being fuelled in part by investors’ expectations of more government support for the sector, but that these hopes could prove overblown.

'Although measures could be impactful, history suggests that they can lack teeth and we believe expectations may have run ahead of themselves,' he said.

He said the 40% rise in Berkeley shares since the turn of the year was ‘at odds with challenging conditions in the higher-end London market, exacerbated by the uncertain election outcome and ongoing Brexit negotiations.’

Key stats
Market capitalisation£1,267m
No. of shares out109m
No. of shares floating54m
No. of common shareholdersnot stated
No. of employees2262
Trading volume (10 day avg.)m
Profit before tax£108m
Earnings per share24.29p
Cashflow per share42.84p
Cash per share65.62p

Peel Hunt sticks with Euromoney ‘buy’ after sale

Peel Hunt is sticking with its ‘buy’ rating on shares in Euromoney (ERM) after the media company announced the sale of the Adhesion Group events business and World Bulk wine exhibitions.

‘No financial detail is given, though we would estimate the consideration to be in the order of £10 million,’ said analyst Malcolm Morgan.

‘We do not see [yesterday’s] news as a catalyst for share price move but it does serve to remind investors of the active portfolio management that is central to Euromoney’s strategy.’

Morgan rates the shares a ‘buy’ with a £13.30 target price. The shares edged 5p lower to £11.62 yesterday.

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Look up the shares

  • Royal Bank of Scotland Group PLC (RBS.L)
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  • BT Group PLC (BT.L)
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  • HSBC Holdings PLC (HSBA.L)
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  • Berkeley Group Holdings PLC (BKGH.L)
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  • Euromoney Institutional Investor PLC (ERM.L)
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