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RBS downgraded to sell by UBS

RBS too pricey, UBS says; BHP Billiton off the 'buy' list at HSBC; Oilfield services sector worth a look in Investec's view

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“Right team, wrong price” is UBS’s verdict on Royal Bank of Scotland (LON:RBS).

The broker opted to downgrade its recommendation on the state-owned bank to ‘sell’ from ‘neutral’, with a 300p target price, previously 350p.

UBS believes boss Ross McEwan, who has picked up the RBS recovery baton from Stephen Hester, can improve the bank’s operational performance and efficiency. 

That’s because the new team it refers to in its title is focused on restructuring the business, while the former management was geared up to bolster the balance sheet.

But there is an issue with a share price that reflects work which is yet to be done, as the Swiss broker explains: “We think the share price already discounts much of the progress we expect the group to make over the next 18 months or so, leaving risk of underperformance even if management outperforms business targets.”

It warns the government, which bailed out the bank at the height of the financial crisis, may not be able to sell off its shares for more than it paid for them (500p) in the next six years.

The price recorded by the National Accounts Office (407p) may be reached by the middle of the next Parliament (2017-2018), UBS added.

Earnings estimates, which are accounted for in the share price in UBS’s view, now reflect the sale of its US business, Citizens.

Its more conservative stance on the Markets business drags its earnings forecasts down by 3% in 2014, but by a more drastic 14% and 19% in the following two years.

The downgrade saw the shares slide 3.2% to 347p on Wednesday.

BHP Billiton (LON:BLT) shares suffered after HSBC dropped its rating to ‘neutral’, having urged investors to buy the stock before Wednesday’s operational update, while William Hill (LON:WMH) shares fell out of the gate as the same broker trimmed its target price to 350p, warning that the bookie is “running out of luck”.

2013 was defined by profit warnings in the oilfield services sector, but Investec thinks the long-term growth story is still intact.

The shift to lower, but more sustainable capital expenditure growth is proving a painful one, Investec says, though there are some stocks worth snapping up on the cheap.

Petrofac (LON:PFC) and Cape (LON:CIU) are on its ‘buy’ list, while recent share price slumps prompt upgrades on Wood Group (LON:WG.), now ‘buy’, and Lamprell (LON:LAM), now ‘hold’.

Amec (LON:AMEC) is cut from ‘buy’ to ‘hold’ meanwhile pending its offer for Foster Wheeler and the resulting fundraising.

Wolseley (LON:WOS) shares trickled lower after the Plumb Center group was downgraded to ‘underperform’ by France’s BNP Exane Paribas, while embattled outsourcing group Serco (LON:SRP) was little changed after HSBC removed its ‘buy’ stance, opting instead for a ‘neutral’ recommendation.

Investors bought APR Energy (LON:APR) stock on the back of an upgrade to ‘overweight’ from heavyweight broker JPMorgan Cazenove, helping the temporary power provider break through the £10 stock price barrier.

Société Générale joined fellow brokers in warning that the supermarket sell-off may not yet be finished following a tough year for the sector.

The French broker thinks last year’s loss of market share for the ‘Big Four’ supermarket groups was just the tip of the iceberg, with plenty more competition to come from the discounters, such as Aldi and Lidl.

“Hard discount does look like a serious threat this time and is expected to affect the sector’s balance,” it said.

RBC Capital has decided that Unilever’s (LON:ULVR) growth model, which is focused on emerging markets, “is not broken, it’s just taking a breather”.

The Dove soap-to-Ben & Jerry’s ice cream group benefited from an upgrade to ‘sector perform’ and a higher price target of £27.

In the small-cap sector, Old Park Lane Capital’s 3.5p target price (up from 2.5p) for Leni Gas & Oil (LON:LGO) would give the company a market value of more than £70mln – before more shares are issued.

The oil firm has begun building new drilling sites in Trinidad, a move which has lifted the share price to a third of that size.

“With the prospect of significantly enhanced cash flow from production over the next three years, we believe that the recent rally in the share price can be maintained,” Old Park Lane told clients.


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