Broker tips: RBS, Wolseley, Cairn Energy

Royal Bank of Scotland’s rating was placed ‘under review’ from ‘buy’ on Friday by Shore Capital after the lender reported “disappointing” first half results.

The bank posted a £2.05bn loss for the first six months of the year, compared to a £179m loss in the corresponding period a year earlier. Chief executive Ross McEwan blamed the loss on legacy issues.

The group also said it will no longer separate and list its Williams & Glyn unit, blaming lower interest rates and complexities. RBS will now sell the 300-branch High Street bank, with Santander UK understood to be a potential buyer.

RBS issued a cautious outlook, citing increased uncertainty following the UK’s vote to leave the European Union and the lower interest rate environment.

“While the H1 financial performance and the outlook are disappointing (and are likely to drive estimate downgrades) we note that balance sheet capitalisation remains strong with the group reporting a core tier 1 ratio of 14.5% and leverage ratio of 5.2% at the end of the period (broadly consistent with the position at the end of the second quarter), thus putting the group in a good position to absorb further potential losses,” said ShoreCap analyst Gary Greenwood.

“In addition, the overall credit quality of the balance sheet continues to improve with risk elements in lending reducing as a percentage of overall balance sheet exposure. “

Greenwood noted that there appeared to have been no material progress on the resolution of outstanding US RMBS litigation for mis-sold packaged accounts. Significant further provisions are anticipated although management notes that it has had positive discussions with a number of interested parties in respect of Williams & Glyn, the analyst said.

“Uncertainty around the achievement of both outcomes has increased during H1 and so, despite the stock trading at a significant discount to book value, it is hard for us to retain a positive stance. We therefore place our recommendation under review (from buy).”

Shorecap reiterated a target price of 192p.

Jefferies downgraded builders’ merchant Wolseley to ‘hold’ from ‘buy’ as it took a look at the wider sector.

It pointed out the shares have risen 17% from their post-Brexit lows and now sit 8% higher than before the UK’s vote to leave the European Union.

“Having heard from three merchants post-Brexit and having seen another month’s macro data we would prefer exposure to the UK-focused companies, where we believe the risk/reward opportunities are more favourable.

“Overall, it is our sense that the immediate share price response to the UK focused names has been an overreaction and, at this stage, trading appears to be better than feared. To that end, with the UK focused names still down 23% post-Brexit, we would prefer exposure to these companies, rather than Wolseley.”

Jefferies noted there have been three updates from the sector post-Brexit. Demand weakened for the traditional merchants in the second quarter and was negative for Grafton in June, butTravis Perkins has been reporting improving trends in July, it said.

The bank said consumer-focused businesses appear to be performing better than those exposed to the wider construction space.

“Howden has seen only a small slowdown in their volume in July and Travis’ consumer division continues to see mid-single digit growth in the first half.

“Perhaps the impact of Brexit on the UK at large is being overstated by those in the London bubble. The housebuilders are telling us that, post an immediate one-week slowdown, reservation rates have returned to previous levels.”

Jefferies said that while the impact of Brexit means remains unclear, it is increasingly confident that it does not mean a return to the volume declines of 2008/9.

Cairn Energy got a boost on Friday as UBS upgraded the stock to ‘buy’ from ‘neutral’ following recent underperformance, with an unchanged price target of 220p.

The bank said several potential sources are emerging in Cairn. Firstly, it said the resumption of drilling in Senegal later this year sees multi-hundred million barrels of upside tested in a frontier, but proven basin.

Secondly, UBS argued that investors get paid to wait for the oil price recovery.

“Cairn's North Sea projects don’t ramp-up until 2H17E and so weak spot prices impact sentiment but not value. Once on-stream Catcher and Kraken give it around 25kboe/d of production which, given large tax loss pools, is notably cash generative.”

Thirdly, UBS said that while visibility on recovery of its 10% Cairn India stake is low ahead of arbitration next year, so are market expectations.

The bank pointed out that Cairn’s share price has sold off in reaction to two partner transactions: Woodside's acquisition of Conoco's 35% stake in the SNE discovery and the mooted Delek/EnQuest Kraken deal.

“Neither looks good at face value, but neither is a fair read-across. Conoco is executing a strategic deepwater withdrawal into a trough asset market. EnQuest, meanwhile, has pressing need for liquidity; tax effects reduce value for a new entrant; and, the final contingent consideration is still unknown.”