Broker tips: Pearson, Weir Group, RBS

Numis reiterated a ‘reduce’ rating and target price of 640p for Pearson on Friday after the education publisher reported its first quarter trading update.

The company reported a 4% drop in first quarter sales in underlying sales, reflecting expected weakness in assessment revenues in the UK and US which are weighted to the first half. Revenues were down 9% at constant exchange rates and headline sales declined by 6%.

Pearson said it was trading in line with expectations during the period with adjusted operating profit and adjusted earnings per share before the costs of restructuring still expected to be £580-£620m and 50p-55p respectively.

“The first quarter is the smallest quarter for Pearson and very small in the context of the year,” Numis said.

“We remain comfortable with a 'reduce' recommendation on Pearson, no change to estimates, we retain a blended multiples based target of 640p.”

Weir Group’s shares rose on Friday after HSBC upgraded the oil and gas services stock to ‘hold’ from ‘reduce’ and raised the target price to 1,150p from 750p.

HSBC said it expects the company to benefit from a pick-up in crude prices in 2017-18.

“We believe 2017-18 will see increased oil and gas activity, which drives our view of oil and gas margin expansion from low levels,” the bank said.

“The company has said a Brent price of $45 for a prolonged period would be enough to kick start North American shale activity. Our HSBC oil and gas team forecasts $60/$75 per barrel as a long term (2017-18).”

Weir on Thursday said it expects first-half profits to be slightly ahead of market expectations, despite a decline in oil and gas activity, supported by cost-cutting and a "resilient" minerals division.

The engineering equipment firm reported a 47% year-on-year fall in orders for its oil and gas division. Original equipment orders dropped 40% while aftermarket orders slid 49%.

Weir said oil and gas markets have continued to slide despite the limited improvement in oil prices since February.

In North America, the division's biggest end market, the US land rig count has fallen by nearly 20% in the past two months. The market expects a 46% reduction in wells drilled in 2016.

Chief executive Keith Cochrane said: "The group remains focused on cost reduction measures which have helped to deliver first-quarter profits slightly ahead of our expectations.

"As a result, we expect first-half profits to be slightly ahead of market expectations. Our full-year expectations remain unchanged, reflecting the slower recovery now anticipated in oil and gas markets."

ShoreCap retained its positive stance on Royal Bank of Scotland following the lender´s latest results but flagged the possibility that setbacks in the sale of its William&Glynn unit might hinder the restart of dividend payments next year.

Analyst Gary Greenwood highlighted management´s remarks that market conditions for Capital Resolution had been "challenging" in the first quarter and how it had flagged up an increased risk of large single-name events which might hurt credit quality due to the uncertain macroeconomic environment.

Nevertheless, whilst RBS´s Core Tier 1 capital fell by 90 basis points to 14.6% it remained well above its minimum target of 13%, resulting in surplus capital on the balance sheet of about £4bn (34p per share), he added.

"While the results themselves are a little disappointing, these have been somewhat overshadowed by yesterday afternoon’s announcement that there is a significant risk that the separation and divestment of Williams & Glyn will not be completed by the 31 December 2017 deadline that the Group has been set by regulators," Greenwood said in a research note sent to clients.

The successful divestment of that unit was a key hurdle for the restart of dividend payments.

Greenwood had pencilled in a final 2017 dividend of 4.7p rising to 13.3p in 2018, but said it remained to be seen how the rgulator would respond.

"We cannot hide our disappointment with both the results and the announcement of the ongoing delay to the divestment and separation of Williams & Glyn, which has frankly now become farcical, to say the least," the analyst added.

Nevertheless, he stuck by his 'positive' stance on the lender´s shares and his 'buy' recommendation but emphasised that his recommendation rested on RBS being able to overcome most of the issues needed to resume its dividend payments, including a sale of Williams&Glynn and settling outstanding claims linked to residential mortgage backed securities in the US.

Hence, he ranked RBS third in preference behind the likes of Lloyds and Barclays.