Broker tips: Weir, RBS, Glencore

JPM said that despite the lack of earnings upgrades, Weir has been one of the better performing stocks in its industrial universe in recent months on the back of rising oil prices.

“We now suspect Weir is close to the point of inflection in terms of its operating profit growth. We regard the new data on drilled but uncompleted wells (DUCs) as encouraging.

“We believe this together with the increase in the rig count results in the risk to consensus earnings forecasts for Weir shifting to the upside.”

JPM said that while the rig count is down around 40% year-on-year, it is up 25% from the May 2016 low, and recently, capex spending plans from a growing number of oilfield service companies have been raised.

“New data on DUCs points to a 10% decline in recent months. Given the aggressive cost cutting, the operational leverage from rising volumes is likely to be high. We have raised our revenue forecast and operating profit forecast for 2017E by 5% and 56%, respectively.”

JPM also said it has lifted its 2017 sales forecasts for the group by 3% to and operating profit estimate by 10% on the back of an improving aftermarket outlook for the Minerals and Oil & Gas divisions.

Investec upgraded Royal Bank of Scotland to ‘hold’ from ‘sell’.

The brokerage said it does not recommend buying the shares given that it expects further material losses through 2016/17 with return on equity less than cost of equity until 2020.

Equally, it no longer reckons that the risk/reward supports maintaining a “naked” short position and advises taking profits.

Investec noted RBS shares fell 10% last weeks as developments around two of the bank’s key known headwinds came into focus.

It pointed to news that Deutsche Bank faces a $14bn settlement with the US Department of Justice and the fact the UK base rate is expected to be cut by 10 basis points, with no increase in rates seen until 2019 at the very earliest.

Investec said the latter was “overly negative” for a highly liquid RBS. “We continue to see RBS as the most exposed UK bank to ‘lower-for-even-longer’ UK interest rates too.

The brokerage maintained its 200p price target on the stock.

Credit Suisse upped Glencore to ‘outperform’ from ‘neutral’ and nudged up the price target to 220p from 210p.

The bank said that since it downgraded the stock back in July, the sector has been range-bound but the lift in coal prices gives it more confidence in the deleveraging and free cash flow generation of Glencore heading into 2017.

“While there is still further to go on deleveraging the bulk of the debt reduction has been delivered and we think this puts a restart of the dividend insight within the next six months.”

CS said that as the story progresses on from balance sheet recovery it sees three drivers of outperformance in the next six to 12 months.

The bank noted free cash flow yields are the highest of the peer group and said this is likely to translate into a sustainable dividend yield of around 5% from next year.

In addition, it said that as the most diversified major it has greater confidence in its 2017/18 cash flow estimates.

Finally, CS said latent capacity in copper and zinc provides around $1.4bn (14%) upside to current group earnings before interest, tax, depreciation and amortisation.

The bank upped its 2017 attributable EBITDA estimate by 6% to $9.2bn, namely on the back of higher thermal coal prices.