Broker tips: RBS, Croda, Sage

Shore Capital reiterated its ‘buy’ rating on Royal Bank of Scotland after the bank reported a surprise hit to its balance sheet as part of a clean-up plan.

In an unscheduled trading update, RBS confirmed it would make a loss for 2015 and announced a large clean-up in the fourth quarter by setting aside another £500m for PPI provisions, $2.2bn (£1.5bn) for US residential mortgage-backed securities probes, and £4.2bn in its pension fund.

The charges are expected to result in a £3.6bn hit to tangible net asset value and result in a 1.6% reduction in the core tier 1 capital ratio.

"I am determined to put the issues of the past behind us and make sure RBS is a stronger, safer bank. We will now continue to move further and faster in 2016 to clean-up the bank and improve our core businesses,” said Ross McEwan.

RBS said it will also it will write down £498m from its private bank Coutts, due to various factors including expectations of a reduction in future profitability due to the continuing low interest rate environment, a higher tax rate, margin pressure and higher capital allocations.

Gary Greenwood, analyst at ShoreCap, said while such headlines are disappointing it wasn’t a total surprise and RBS has the balance sheet strength to comfortably absorb the costs.

“To us, this action represents a further cleaning up exercise in the RBS investment story and something that therefore helps to remove uncertainty and improve transparency,” Greenwood said.

“Adjusting our end December 2015 tangible net asset value per share forecast for this announcement would see it reduce to 354p, but with the shares already trading at a 27% discount to this level, we reiterate our positive stance. Buy.”

Exane BNP Paribas has cut Croda International from ‘neutral’ to ‘underperform’, citing tougher competition, slower growth and lower margins.

The investment bank said on Wednesday that the competitive environment the chemicals company operates in has structurally changed.

“Croda attributes its growth ‘soft patch’ in FY13-14 to slower end-markets, and less ingredient innovation by HPC customers,” it noted.

“Yet our benchmarking analysis suggests peers weathered these headwinds better. These competitors continue to invest heavily for further growth.”

It also said that there’s increasing evidence that the threat against Croda’s innovation leadership is increasing.

Exane BNP Paribas highlighted a number of risks in the Crop Care business specifically, including a customer base that’s consolidating, as well as high inventories in the northern hemisphere after a weak 2015.

It said the company is no longer a cash generation machine.

“Working capital intensity (mainly inventories) has been increasing since FY11. Capex at 2-2.5x depreciation for the next two years implies a significant near-term headwind.”

Croda International’s target price was also cut from 2,880p to 2,500p.

Sage's first quarter management statement contained both positives and negatives and with the stock trading at a slight premium to its sector Panmure Gordon reiterated its recommendation to 'hold'.

On the upside, the business software provider reiterated its fiscal year guidance and there was an up-tick in organic revenue and net debt, analyst George O´Connor said in a research note sent to clients.

Furthermore, the company was confident on the outlook for fiscal year 2016, projecting an increase of at least 6% in organic revenue and operating margins of 27%, he said.

However, the company made no comment on the US, where there had been at least one high-profile departure.

Also on the negative side of the ledger, the outfit was focused on customer acquistion with more subscribers typically coming in at the lower end of the low value products range, as it focused on customer acquisition at the entry level, O´Connor explained.

It had begun a price war in that segment, which entailed the risk that customers would flip-flop between competing offers, O´Connor added.

Historically, the company had a poor record in terms of customer renewals as it pursued M&A and then "milked" the customer base of the companies it acquired, the analyst said.

Nevertheless, O´Connor stood by his target price on the shares of 594p.