Broker tips: Mears Group, Wood Group, RBS

Mears Group’s shares rose slightly as Investec said the company’s full year results were “solid enough” and in line with expectations.

Investec retained its ‘hold' rating and left its target price at 440p after the service provider for the social housing and care sectors reported a 12% fall in annual profit before tax to £36.8m.

The acquisition of the loss-making Care at Home business from Care UK in May 2015 cut into profits but was anticipated.

The business nevertheless made healthy revenues, helping the care division to achieve an 18% increase in revenue to £146m despite a reduction in margins.

Social housing revenue climbed 3% to £735.1m, driven by a positive contribution from the acquisition of Omega in October 2014.

Group revenue rose 5% to £881.1m and the dividend was raised 10% to 11p.

"Full year results are broadly in line with our expectations, with Housing posting a good performance (particularly within the Housing Management business) and Care again proving a challenge," said Investec analyst Andrew Gibb.

"The group will have to contend with the additional financial pressure on the National Living Wage in 2016, although initial reactions from clients have been ‘encouraging’. Key to this story is the recovery in growth in Housing and the level of new (contract) wins during the year (£900m) suggests this is emerging."

Wood Group shares slumped on Tuesday after Canaccord Genuity cut its stance on the stock to ‘sell’ from ‘hold’, saying the stock was overvalued following the recent outperformance.

It said the company’s full year results were broadly in line with existing consensus and although the group did not provide any formal guidance, the outlook for this year remains reasonably positive, with earnings likely to be down no more than 25% despite the major industry downturn.

The brokerage said it was surprised to see the dividend lifted as much as 10%.

“On the current trajectory, payout will reach 53% (on adjusted diluted EPS) this year. After many years of above-sector dividend growth we think this source of performance is now exhausted,” it said.

Canaccord upped its price target on the stock to 575p from 550p to reflect the broader sector rally but said the current share price does not fairly reflect Wood Group’s relative merits.

It pointed out that while the majority of Wood Group's US activity is in operations and maintenance, and a growing chunk is outside upstream oil & gas entirely, the group still has a much greater exposure to US rig counts than its UK listed peers, with the exception of Hunting.

“In this context we find it surprising that the stock has been so resilient year-to-date, as US rig counts have been uniformly negative, reaching post-1940s lows in the past two weeks and looking likely to plumb fresh depths.”

In addition, Canaccord said its recent visits to Aberdeen confirm the very poor outlook for the UK North Sea. Although Wood Group’s international upstream activities offer some short-term resilience, there is less certainty in the medium-term.

Royal Bank of Scotland got a boost as Goldman Sachs upped the stock to ‘buy’ from ‘neutral’ and added it to its Conviction List.

The upgrade was premised on three key points.

Goldman said RBS’s valuation now screens as attractive. The shares have de-rated and are trading at a 50% discount to Lloyds on a trailing price to tangible book value ratio.

It also said the bank was well positioned to substantially expand its market shares in the attractive domestic mortgage market as its large share in current accounts offers a strong funding advantage.

Finally, GS said the over 70% cut in its investment banking risk-weighted assets will over time free up capital and help RBS improve underlying returns, narrowing the gap versus Lloyds.

Goldman said it prefers RBS over Lloyds Banking Group, which it rates at ‘neutral’, on valuation grounds and net interest income trends.

GS said that following analysis of the two banks’ funding structures, it founds RBS has a funding advantage, paying on average around 40 basis points less for deposits.

“This advantage appears structural, driven by RBS’s larger share of current accounts (18% market share versus only 8% in mortgages). We believe this underpins RBS’s aggressive growth ambitions in UK mortgages.”

GS said key risks to its view on RBS relate to litigation, regulatory changes, execution risk in disposing of Williams & Glyn, the UK’s upcoming referendum on the EU and higher-than-expected exit losses in running down legacy IB assets.

Goldman trimmed its price target on RBS to 375p from 380p.