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Broker tips: RBS, Glencore, Jadestone Energy

By Iain Gilbert

Date: Thursday 15 Aug 2019

(Sharecast News) - UBS reiterated their 'buy' recommendation for shares of majority state-owned lender RBS in the wake-off of weakness in the share price following its second-quarter results, arguing that while not wholly unexpected, the stock was now "oversold" - if one made an assumption or two.
"With yield curves implying rate cuts ahead, Brexit uncertainty high and 2Q19 results a 7% miss driven by net interest income we weren't surprised to see the share weak, post reporting. But here we think the stock is oversold and its capacity to return excess and future surplus capital generation is undervalued," analysts Jason Napier and Charmsol Yoon said in a research note sent to clients.

However, their revised estimates assumed that Bank would not cut rates and that margins would stabilise in the back half of 2020.

In turn, that hinged on a Brexit agreement finally being reached or an extension being granted, and that the ongoing "meaningful" recovery in front book mortgage spreads would stick, they said.

The analysts were expecting RBS to return 30.0% of its market capitalisation to shareholders via either dividends or share buybacks over the next two years.

And if needed, the new chief executive officer had the option to funnel those resources into a restructuring of underperforming businesses or investments to lower operating expenditures. That "optionality," they argued, was "undervalued".

Nonetheless, they did mark down their estimates for RBS's earnings per share between 2019-22 by 12-16.0%, which together with peer group multiples and prospective restructuring charges led the analysts to lower their target price from 285.0p to 265.0p.

Analysts at JPMorgan Cazenove downgraded heir recommendation on shares of mining giant Glencore to 'underweight' on Thursday, citing deteriorating fundamentals.

JPMorgan said that with trade war and global recession risks having risen since new tariffs were imposed on China by the US on 1 August, the group's outlook was not quite as sturdy as it had been.

The bank's 2019 operating earnings estimates for Glencore had fallen by 40% year-to-date on the back of lower commodity prices and unresolved operational issues, with the latter accounting for around $2bn of the $8.0bn decline.

JPMorgan noted that Glencore's debt reduction prioritisation was likely to preclude expansion of the $2.0bn share buy-back programme and also highlighted that dividend support was "most vulnerable" to macro deterioration and external shocks.

"6.1/6.0x spot EV/EBITDA for 2019/20E is the most expensive of the diversifieds and a structural de-rating is credible if GLEN's operating, geopolitical and regulatory risks are unresolved," said JPMorgan, which added that in terms of risk-adjusted returns, Glencore was "unattractive" versus the likes of Rio Tinto, BHP and Anglo American.

In addition to the downgrade from 'neutral' to 'underweight', Berenberg lowered its target price on the stock from 330p to 260p.

Analysts at Berenberg initiated coverage on Jadestone Energy at 'buy' on Thursday, stating that the company's efforts to turn around mature assets that had been neglected by their previous owners during the downturn would lead to the stock's re-rating if successful.

If Jadestone, an Asia-focused exploration and production company chasing organic and inorganic growth opportunities in the region, can successfully turn around the assets, Berenberg said its stock would re-rate from an enterprise-value-to-earnings before income, tax, depreciation amortization and exploration expenses ratio of 0.7x in 2020 to the sector-average of 3.8x.

Berenberg noted that following Jadestone's acquisition of two oilfields located offshore Australia, the group managed to increase combined production by 8,000 barrels of oil per day, but said "strong results" had been partially offset by extensive maintenance undertaken at both fields to rectify some legacy issues.

"We expect further value generation as turnaround initiatives start bearing fruit," said Berenberg, which started the group off with a 110.0p target price.

The German broker estimates the fields could generate an incremental value of $310.0m at $65 per barrel, through it highlighted that additional investments in the fields as well as further cost optimisation would likely be required.

"Success at Stag and Montara would serve as a proof of concept for management, allowing it to pursue further inorganic opportunities in the region," said the analysts.

In addition to incremental value at Stag and Montara, Jadestone was focused on organic development of its Nam Du and U Minh gas assets in Vietnam, expected to be sanctioned in the third quarter.

Berenberg estimates the fields could add $316m or 54p per share of unrisked value.


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