Broker tips: RBS, Aberdeen Asset Management, RSA Insurance

UBS downgraded Royal Bank of Scotland to ‘neutral’ from ‘buy’ and cut the price target to 250p from 310p, pointing to significant payout uncertainty.

UBS said first-quarter adjusted pre-tax profit of RBS’s ongoing businesses beat its estimates by 16%, with all meaningful divisions overall more profitable than it had expected.

It noted that even challenged CIB turned in a smaller loss than it had estimated.

UBS said it sees broadly as much surplus capital as before. It said that despite providing for £11bn in losses and charges between 2016 and 2020 for non-core run-down, restructuring costs and legacy liabilities, it expects RBS to have the capacity to return 40% of market cap over three years.

“But despite a core bank which is outperforming our expectations and mostly composed of businesses we think attractive, the risks on the timing of capital returns are now too significant for us to maintain a buy,” UBS said.

UBS said that without the return of surplus capital in the nearer term, RBS looks fair value, trading at 0.7x tangible net asset value for a 6-7% return on tangible equity.

“Though our 2018-2020 dividend yield estimates are well over 10%, the higher risks attaching to these later payments, and greater concerns around capital tied up in the ongoing bank are the key drivers of a fall in our sum of the parts-derived target price to 250p from 310p.”

Aberdeen Asset Management’s shares slumped on Tuesday as Numis downgraded the stock to ‘hold’ from ‘add’ after the company reported a drop in first half profit.

In the six months to the end of March, underlying pre-tax profit fell 40% to £162.9m, as net revenue declined 20% to £483.6m.

Assets under management dropped to £292.8bn from £330.6bn the year before, and the company kept its interim dividend per share unchanged at 7.5p.

Numis said it was “an all-round bad set of results”, with AUM 2% lower than expected.

On Aberdeen’s £70m cost saving programme, Numis said: “Whilst significant vs. run rate costs of around £655m and earnings before interest and tax around £310m, it is unclear how much of this is real cost take out versus expected variable cost reduction on lower revenues and versus previously announced cost saving initiatives.

“The only positive we could take away from these results is that it appears that emerging market related flows improved or got no worse than prior quarters. We downgrade our recommendation from 'add' to 'hold' reflecting these weak results and further significant re-rating.”

Numis said in the short-term the group remains very much exposed to emerging markets so the broker would prefer to wait for a more attractive entry point.

In the long term, Numis believes Aberdeen can achieve growth in other areas and can make further cost-cutting motivated acquisitions. The analyst left the target price at 295p.

RSA Insurance got a boost on Tuesday as Barclays upgraded the stock to ‘overweight’ from ‘equalweight’ and lifted the price target to 545p from 457p.

Barclays said RSA’s full-year 2015 underlying results were “very strong”, beating company collected underlying earnings per share consensus by 20%.

Most impressive was the speed at which the loss ratio has started to improve, the bank said.

It noted RSA’s plans to close the gap to the best in class players in each of its core markets, UK, Scandinavia and Canada by 2018.

“While we acknowledge that it is rare for a mid of the pack insurer to become a ‘best in class’ insurer, we do believe RSA has set out a realistic plan to get there,” it said.

RSA is aiming to have a combined ratio of 94% or lower in the UK and Canada, and 85% or below in Scandinavia.

Barclays reckons there is significant upside even if the company is only partially successful, and its new price target is based on RSA getting halfway to its targets. The bank’s base case assumes RSA gets halfway to its targets, with 2018 earnings per share of 48p and a combined ratio of 92.8%.

“In the short term, restructuring costs, pension contributions and the impact of the pull to par will restrain dividends, but we expect special dividends to start by 2018, with a yield of 6.6% in 2018, increasing to 8.1% in 2019,” Barclays said.