The Expert View: RSA, RBS and Merlin Entertainments
Our daily roundup of analysts' share recommendations and commentary, also including Xchanging and WPP.
Merlin continues to work its magic
Full year results from Merlin Entertainments (MERL.L) show ‘monster growth potential’, according to Jefferies analyst Mark Irvine-Fortescue.
He retained a ‘buy’ recommendation and a target price of 425p on the shares, which were trading at 371p yesterday, stating the ‘premium rating’ is based on ‘double-digit earnings…strong and stable cashflows, and a disciplined approach to capex’.
Irvine-Fortescue said that Merlin, which owns Legoland and recently announced a new brand of Shrek-themed parks, has ‘one of the most attractive [investment cases] in the Travel & Leisure sector’.
Merlin is expected to benefit from growth in leisure spend and expansion of the middle classes in emerging markets and the growth in international travel and short breaks.
The portfolio of attractions is ‘well-balanced’ in terms of outdoor and indoor activities and visitor types.
‘Our blue sky scenario implies an equity value of >500p.’
RBS £8 billion loss prompts downgrade
Shore Capital analyst Gary Greenwood has downgraded RBS (RBS.L) from to ‘hold’ from ‘buy’ after it revealed losses of £8 billion in its full year results.
Greenwood did not place a target price on the shares, which fell 7% to 328p yesterday, as he believes it will take longer for the bank to realise its new strategy.
‘Management has…announced a new strategy that will see the company focus on three main business segments: personal and business banking, commercial and private banking, and corporate and institutional banking,’ he said. ‘In addition the company will place greater emphasis on cost efficiency, targeting a reduction in the cost/ income ratio to below 55% by 2016/17…However it will take longer than we had expected for the company to earn a return on equity above the cost of equity.’
Although the shares are trading a 3% discount from December ‘the disappointing guidance on returns’ means ‘the stock may struggle to push materially beyond total net asset value in the near term’.
WPP downgraded after long-term margin improvements lowered
Advertising and public relations companyWPP (WPP.L) has been downgraded by Liberum after below consensus 2013 results and fears about long-term adjustments.
Liberum analyst Ian Whittaker downgraded the company from ‘buy’ to ‘hold’ and placed the target price under review; the share price fell 5% yesterday to £12.63.
‘Full year results were below our expectations due to a margin miss, and slightly below consensus,’ he said. ‘However, the main reason for the downgrade is that WPP has taken down its longer-term margin improvement targets, which is a negative surprise, especially given the back office centralisation efforts.’
He added that while January has started well and the company had increased its share buy-back ‘this does not offset the disappointment message on margin improvement’.
Whittaker expects the shares to lack momentum despite being a ‘well positioned agency’ and a good digital strategy.
Xchanging is upgraded but shares could ‘pause for breath’
Cantor analyst Sam Thomas has upgraded technology provider Xchanging (XCH.L) after a successful turnaround of the company.
Thomas placed a target price of 200p on the shares, which were at 180p yesterday, as 2013 full year results came in-line with consensus and showed ‘excellent cash conversion…with net cash position increasing +56% to £120 million’.
‘The dividend yield now stands at 1.3% (vs 0.5% in FY2012),’ said Thomas. ‘Reflecting this strong performance, the company is increasing the dividend to 2.5p per share.
‘In our view, the management team has successfully turned round the business and put in place a solid platform for growth. Whilst we continue to believe Xchanging’s new sales led strategy and focus on higher margin, technology enabled services, is working well…we believe the shares could pause for breath.’
The shares have outperformed the wider market by some 50% over the past 12 months.
RSA downgraded after below-consensus results
The appointment of Stephen Hester as new RSA (RSA.L) chief or his plans to shore up the insurer are not enough to keep it from a Numis downgrade.
Analyst Nick Johnson downgraded the insurer from ‘hold’ to ‘reduce’ and placed a target price of 85p for the stock, which fell 2.5% to 99p yesterday on the back of weaker than expected 2013 results and an operating profit of £286 million versus consensus of £348 million.
Hester set out capital raising plans, including a £775 million rights issue and £300 million from business disposals.
‘The rights issue is likely to enhanced net tangible assets per share, but in our view the return on net trade assets target is insufficient to support the current share price,’ said Johnson. ‘We continue to see downside risk and move to a reduce rating given recent share price strength.’