The Expert View: RBS, JD Wetherspoon and BSkyB
A roundup of analyst recommendations and comments, also including Aveva and Whitbread.
RBS to be profitable in two years, says Liberum
Liberum is backing taxpayer-owned RBS (RBS.L) to become ‘highly profitable and low risk’ by 2017 as it off-loads bad banking.
Analyst Cormac Leech retained a ‘buy’ recommendation on the shares and increased Liberum’s target price 31% to 445p.
‘RBS has the potential to be highly profitable and low risk by 2017,’ he said. ‘The bad bank is off-loaded, the balance sheet stops shrinking, Citizens is sold, the liquidity portfolio is run down by £25 billion+ and Direct Line is replaced by an alternative financial investment.
‘That implies an earnings per share of 42p.’
Leech said the shares were out of favour with investors and looked cheap but ‘two years on and it will be run for profit, not just safety, as risk-averse civil servants cede control’.
Peel Hunt toasts the good health of JD Wetherspoons
Pub chain JD Wetherspoon (JDW.L) has delivered strong sales but lower margins in its Q2 results due to investment in new pubs.
Peel Hunt analyst Nick Batram said sales growth of 6.7% was ‘pretty impressive’ but it was offset by a slip in operating margins to 8.1% against an expected 8.3%.
However, Batram still retained a ‘buy’ recommendation and a target price of 842p as the fall in margins was due to investment in 18 new sites in the financial year and 11 more sites under development.
‘The target of 40-50 new openings remains,’ said Batram. ‘Much of the margin decline is due to investment in infrastructure as the opening programme accelerates. [Moving forward,] concerns over another margin decline may well see the shares comeback in the short-term. However, a significant amount of the margin investment has been made because the strong top line has enabled it.
‘Looking further out we do see room for positive surprises in H2.’
BskyB still looks good despite Champions’ League disappointment
The loss of Champions’ League football for BskyB (BSY.L) is not expected to overshadow its interim results next week.
Numis analyst Paul Richards retained his ‘add’ recommendation and target price of 941p on the shares.
Richards said Sky is continuing to roll out connected services, such as SkyGo Extra and OnDemand, and has ‘customer satisfaction advantages’ over its rivals. It is also planning to invest £60-£70 million in its connected services in 2014, which will create ‘long term value’.
‘Sky’s progress in connected services has been overshadowed by the loss of Champions’ League football and the fear as to what this could mean for the Premier League renewal later this year/ early 2015,’ he said.
Jefferies downgrades Aveva to ‘hold’ on project delays
Jefferies has downgraded engineering software supplier Aveva (AVV.L) from ‘buy’ to ‘hold’ following project delays and fears of short-term headwinds.
Analyst Milan Radia also reduced the target price for the shares from £27.40 to £25.80 stating that ‘shorter term demand trends appear to be a little muted’.
Aveva, which supplies software to oil companies, has been disappointed by BP’s decision not to proceed with a roll-out of Aveva software ‘on the grounds, we suspect, of complexity and cost’, said Radia.
The company is also failing to make its mark in South American markets, but it is not all bad news.
‘We remain convinced of Aveva’s technology market leadership and of the prospects of success of the new E3D product,’ said Radia. ‘Elsewhere, the UK nuclear programmes will involve deployment of Aveva’s software given that EDF and Capgemini are customers in that segment.’
Costa brand to boost Whitbread, says Barclays
Costa Coffee owner Whitbread (WTB.L) is set to benefit from a sharp increase in UK coffee shops over the next eight years and a potential increase in drinks prices this year.
Barclays analyst Vicki Stern has maintained her ‘overweight’ recommendation but increased the target price for Whitbread shares from 39.2p to 42.3p following a meeting with researchers of the branded UK coffee market.
Stern said the coffee shop market ‘can comfortable reach 9,500 shops by 2021 (vs 5,531 today)’ and turnover to come from new units and like-for-like sales growth.
Costa, Whitbread’s key coffee chain brand, has outperformed the competition and gained a 20% share over the past six years, and it still has room this year to increase prices.
‘Price sensitivity and spend per visit indicators point to a more relaxed consumer,’ she said. ‘Correspondingly, Starbucks has increased coffee prices by c5% and we would not be surprised to see Costa follow this year.’