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Broker tips: RBS, TalkTalk, Capita, Aston Martin Lagonda

By Iain Gilbert

Date: Wednesday 15 Jan 2020

Broker tips: RBS, TalkTalk, Capita, Aston Martin Lagonda

(Sharecast News) - Royal Bank of Scotland was under the cosh on Wednesday after Barclays downgraded its stance on the shares to 'underweight' from 'equalweight'.
Barclays said net interest margin pressure and risk-weighted assets inflation are set to weigh on UK retail and commercial returns, while the restructuring of the underperforming NatWest Markets and Ulster businesses will require patience. In addition, the surplus capital return will be back-end-loaded, it said.

"RBS has been sustaining high returns in recent years; however, our analysis suggests net interest margin headwinds are under-appreciated (particularly if the Bank of England cuts the base rate on January 30th) and RWA inflation will also likely drag."

Barclays, which kept its 225p price target on the stock, said that at 9.5x 2021 earnings per share estimates, it is no longer cheap versus peers.

The bank cut its EPS estimates for 2020/21 by around 2% and moved its valuation forward to 2022. "There has been some unwind of the discount rate as we move from October 2020 valuation to January 2021," it said.

Analysts at Berenberg initiated coverage on telecommunications provider TalkTalk at 'sell' on Wednesday, calling the firm "weak" and "not cheap".

Berenberg said the bulk of TalkTalk's value lied in its roughly three million retail relationships with UK households but noted that over the last decade, the group had suffered declining market share, revenue and profits, while its net debt increased due to dividend overdistribution.

Driving the latter was the company's long-running habit of stripping 'one-off' costs from its headline financials, on which management bonuses are based, resulting in a wide gap versus statutory profits.

With the competitive environment worsening in UK telecoms and regulation shifting towards incentivising network investment, an area to which TalkTalk is less exposed, Berenberg said the firm was left in "a challenging position".

"TalkTalk has too much debt, lacks scale, has a track record of poor customer service, and has incurred significant recurring 'one-offs' in the last decade," said Berenberg, which issued the firm with an 80p target price," it said.

The carrier's net debt was 3.3 times' its earnings before interest, taxes, depreciation and amortisation.

"Given these issues, we do not feel that valuation multiples broadly comparable with the sector are deserved," Berenberg continued.

Goldman Sachs reiterated its 'buy' rating on shares of outsourcer Capita on Wednesday as it hiked the price target to 240p from 200p and added the stock to its 'Conviction List'.

GS said the first-half results saw the company reach a trough in terms of organic revenue declines given the improving momentum on the order book, especially in the software division.

"With the UK elections now behind us, we think the macro overhang on the stock has been removed and focus should shift to the core equity story viz. growth driven by consulting-led, digitally-enabled software solutions and services," it said.

"We see a return to positive organic growth and positive free cash flow generation in 2020 and, with the shares trading on circa 9% 2021E FCF yield versus Business Services at 6%, we see scope for a material re-rating as the company delivers on its transformation plan."

The bank said it expects to see a return to positive organic growth in the software division at the full-year results in March, with improving momentum in most of the other divisions, apart from government services.

"We also expect continued margin improvement across the divisions led by the restructuring programme, which also should support future FCF generation," it added.

Aston Martin Lagonda was under pressure on Wednesday as Jefferies said the luxury car maker would need to raise "at least" £400m of fresh equity.

The bank, which rates the stock at 'hold' with a 475p price target, added that in itself, this may not ensure sustained profitability.

"Given the challenges of the supercar industry, we must assume that the aspiring AML investors are considering a transformational deal, and not just funding AML. Scaling up super cars is hard to do, as we also see at McLaren, where low margins seem to be a function of low volume, while AML is more challenged on mix/price," Jefferies said in a note.

Aston Martin has confirmed it is in talks with potential strategic investors "which may or may not involve an equity investment". According to press reports, Canadian billionaire investor Lawrence Stroll, Chinese original equipment maker Geely and Chinese battery manufacturer CATL may be interested.

"Among these, CATL has denied being involved and Geely stands out for its track record of supporting Volvo Cars' turnaround and could bring some expertise, although we see limited synergy with Geely-owned Lotus, which operates in different segments and has different engineering expertise," Jefferies said.

"We see a low probability of an established OEM stepping in at the current valuation and given the distractions that AML would cause. In our view, only Daimler might consider supporting AML, partly to safeguard the volume of engines sold and therefore scale for the AMG brand."

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