Broker tips: RBS, easyJet, IAG, Serco

Exane BNP Paribas upgraded Royal Bank of Scotland to ‘outperform’ from ‘neutral’ and lifted the price target to 370p from 360p.
Over the last year, the bank has maintained a relatively cautious investment stance on RBS.

Over the last year, the bank has maintained a relatively cautious investment stance on RBS.

It said that despite the appeal of the restructuring story and potential excess capital, its concern was that the eventual earnings power of the bank was likely lower than many thought.

However, with the share price down 20% since the start of 2015, a greater appreciation of the medium-term prospects for earnings, and substantial improvements in the balance sheet over the last 10 months, Exane turned more positive on the stock.

Shares in outsourcing group Serco got a boost after RBC Capital Markets upgraded the stock to ‘sector perform’ from ‘underperform’, keeping the price target at 9,500p.

“Whilst risks clearly remain and the recovery will take time, for the first time in a while we see more limited downside and the balance sheet is no longer an issue post the Intelenet disposal,” the bank said.

Nonethless, RBC said there were still a number of issues with the stock, which has been hit by a string of profit warnings.

It said that gauging where the revenue base will trough is tough, and there remains some uncertainty around the Atomic Weapons Establishment contract, which accounted for £17m of 2014 EBITA and where it would expect some commentary from the government in early 2016.

In addition, the bank said the cost of exiting the remaining business process outsourcing units is still unclear.

However, RBC pointed out there were some areas of potential upside.

It said there is some scope for the final outcome on onerous contracts to be better than expected.

HSBC downgraded EasyJet to ‘reduce’ from ‘hold’ and cut the price target to 1,600p from 1,800p.

The bank said EasyJet is an excellent business and has traded very well this summer. However, it expects increasing unit revenue pressure from accelerating capacity growth into winter 2015.

HSBC said it has reverted to its view that the European short-haul market looks inherently unstable, with five companies pursuing the number three position in the industry.

The bank also cut its stance on International Consolidated Airlines Group, to ‘hold’ from ‘buy’ and trimmed the target price to 6,250p from 7,000p. “We think that investor expectations on IAG are very high," it said. "We think that the company will deliver strong profit growth in full-year 2016 and is now starting shareholder cash returns.

It expected IAG to reassure the market on its strategy at this Friday’s capital markets day, but said most commentators are already of the view that this is a strong business.