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The Expert View: RBS, Tesco and Burberry

Our daily roundup of analyst commentary on shares, also including Barratt Developments and Schroders.

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Key stats
Market capitalisation£30,384m
No. of shares out11,843m
No. of shares floating3,463m
No. of common shareholdersnot stated
No. of employees76200
Trading volume (10 day avg.)11m
Turnover£11,258m
Profit before tax£-6,955m
Earnings per share-59.49p
Cashflow per share-50.66p
Cash per share774.14p

Jefferies: RBS faces $3.75bn fine after US settlement

Royal Bank of Scotland (RBS) has cleared a ‘major hurdle’ in its $5.5 (£4.3) billion settlement over US mortgage bond mis-selling but it is not out of the woods yet, according to Jefferies International.

Equity analyst Joseph Dickerson said RBS had paid around $1 billion more than expected to resolve the case with the US Federal Housing Finance Agency over its role in issuing and underwriting $32 billion of residential mortgage-backed securities (RMBS) before the financial crisis.

However, most of this would be met from litigation reserves and would only require further provision of $196 million in the second quarter, he said, reiterating his ‘hold’ rating and 262p price target. RBS shares shed 5p, or 2%, to 251.5p yesterday afternoon.

Nevertheless, the bank still faced paying up to $3.75 billion to settle a separate investigation by the Department of Justice, although the fact there was no new top-up to provisions here suggested that the case was not that advanced, Dickerson added.

‘The FHFA settlement removes a major uncertainty surrounding RBS's capital resources. Still, likely significant RBS costs remain, namely the cost of the DOJ fine. Our estimates contemplate a further RMBS provision top-up of $2.5 billion in Q4 17,’ the analyst added.

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Key stats
Market capitalisation£13,984m
No. of shares out8,188m
No. of shares floating8,035m
No. of common shareholdersnot stated
No. of employees464520
Trading volume (10 day avg.)30m
Turnover£55,917m
Profit before tax£72m
Earnings per share0.88p
Cashflow per share16.70p
Cash per share83.57p

CMA referral shows Booker a ‘distraction’ for Tesco

The Competition and Markets Authority’s decision to refer Tesco’s proposed £3.7 billion takeover of wholesale Booker (BOK) for a detailed investigation confirms Shore Capital in its negative view of the deal.

‘We reiterate our belief that the acquisition does not move the dial for Tesco (TSCO), and could prove a distraction as it seeks to rebuild its UK retail margin and so reiterate our “hold” stance,’ said analyst Darren Shirley.

‘For Booker we believe the merger highlights the strategic constraints facing the group over the medium to long term and we reiterate our “sell” recommendation, though concede the 350 areas being reviewed is less than could have potentially come under deeper investigation,’ he added.

The news was not unexpected and Tesco shares eased 0.3p to 170.7p and Booker shed 1.3p to 188.2p.

The CMA believes that in areas of overlap between Tesco shops and Booker supplied stores, shoppers could face worse terms when buying their groceries. The watchdog has promised to fast track the ‘phase two’ inquiry and to publish its report before Christmas.

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Key stats
Market capitalisation£9,102m
No. of shares out283m
No. of shares floating89m
No. of common shareholdersnot stated
No. of employees3643
Trading volume (10 day avg.)1m
Turnover£2,145m
Profit before tax£490m
Earnings per share174.76p
Cashflow per share191.30p
Cash per share1,327.66p

Fundamentals favour Schroders, says Liberum

Liberum Capital has raised its price target for Schroders (SDR) after increasing its forecasts for the fund manager’s earnings by 10%.

Ahead of half-year results on 27 July, analyst Justin Bates has updated his figures following the group’s first quarter results. He now expects 2017 earnings per share of 201.9p, up from 182.6p last year, rising to 213p in 2018 and 225p in the year after.

On this basis he has lifted his share price target to £33.87 from £27.89.

‘Despite the many headwinds eg, growth of passive, increasing regulation and pricing pressure, the underlying fundamentals for long-term savings remain positive, particularly Asia,’ he said.

Schroders shares added 19p or 0.6% to £32.20.

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Key stats
Market capitalisation£5,929m
No. of shares out1,008m
No. of shares floating975m
No. of common shareholdersnot stated
No. of employees6209
Trading volume (10 day avg.)5m
Turnover£4,235m
Profit before tax£550m
Earnings per share54.32p
Cashflow per share54.77p
Cash per share75.61p

Peel Hunt hails ‘solid’ Barratt Developments

Peel Hunt is sticking with its ‘hold’ rating on Barratt Developments (BDEV) after a strong full-year update from the house builder.

The shares rose 5p to 589.5p yesterday after Barratt reported profits would rise 12% to £765 million, ahead of market expectations.

Peel Hunt analyst Clyde Lewis kept his 625p target price on the stock. ‘A strong full-year update with profits 4% ahead of previous guidance largely due to a better performance on margins,’ he said.

‘Net cash of £720 million is better than expected and the group has reaffirmed its dividend commitment. While there is little on current trading, the forward order book is comfortably ahead and modest volume growth is expected in the coming year.’

Lewis said he would keep his ‘top end’ estimate for 2018 unchanged, labelling the stock a ‘solid performer’.

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Key stats
Market capitalisation£7,105m
No. of shares out436m
No. of shares floating417m
No. of common shareholdersnot stated
No. of employees9828
Trading volume (10 day avg.)3m
Turnover£2,766m
Profit before tax£287m
Earnings per share64.86p
Cashflow per share99.32p
Cash per share189.48p

Burberry retains lustre in China

Investors in Burberry (BRBY) received a welcome surprise yesterday when the luxury goods maker reported better-than-expected sales, up 4% in the first quarter.

The shares jumped 3.2% to £16.30 as investors welcomed the companies’ news that ‘top customers’ were returning to its products.

‘In other words, the Chinese are spending again,’ said Steve Clayton, who holds 3.6% of his HL Select UK Growth Shares fund in the stock.

‘Retail sales on the mainland were in the mid-teens and Hong Kong continues to improve after a tough patch.

‘This is an encouraging performance from Burberry, which looks to be at long last pulling out of the doldrums. With an acceleration in new product launches set for the second half of the year, the underlying progress at Burberry should improve steadily.’

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