Broker tips: African Barrick Gold, RBS, Reckitt Benckiser

28th Jul 2014 14:33

African Barrick Gold (ABG) delivered a brilliant performance during its second quarter and first half of the year, with accelerating free cash flow generation set to drive a re-rating of the shares, according to analysts at UBS. The broker thus highlights how all-in sustaining costs (AISC) dropped for a seventh consecutive quarter, allowing the firm to deliver positive free cash flows (FCF) for the first time since 2011 and with cost-out targets for the year set to be surpassed. Furthermore, the company increased its production guidance and now expects costs to be at the bottom end of previous guidance.To take note of, however, African Barrick's Buly project delivering in the second half of the year is "key if ABG are to sustain production/cost momentum and meet revised guidance for fiscal year 2014."Hence, as FCFs accelerate ABG stock is expected to re-rate versus its gold peers. The shares are now trading at 0.9 times their price-to-net present value versus 1.1 times for European gold miners and global peers at 1.2 times. On the back of all of the above UBS has raised its price target to 290p from 260p beforehand while reiterating its buy recommendation.Royal Bank of Scotland (RBS) is progressing better than expected on the run-down of the assets of its non-core RBS Capital Resolution (RCR) arm, but its valuation already captures the "steady state" profile of returns which can be expected, according to Credit Suisse.The lender's latest results revealed that the above run-down is more capital efficient than had been expected. In fact, cumulative RCR pre-tax losses, which are now seen at £2.5bn over 2014-16 are at the lower end of RBS' guidance and may yet fall lower still, Credit Suisse explained in a note to clients.However, management has not revised its forecasts for its Tier-1 common equity ratio (CET1) at the end of 2015 (11%) and 2016 (12%), which Credit Suisse already sees coming in at 10.4% and 12.6%, including the impact from the deconsolidation of Citizens. Similarly, the above analysts' forecasts for RBS's loan loss provision ratio in 2015 and 2016 are already running at the lower end of management's guidance. The stock is trading on an 'adjusted' return on tangible equity ratio (RoTE) for 2016 of approximately 6% to 7% and close to 8% in steady state terms. As a result of all of the above, the broker has increased its price target on the shares to 310p from 280p previously, but reiterated its 'underperform' recommendation.Uncertainty surrounding a decision by Reckitt Benckiser to de-merge its drug arm has taken the shine off strong first-half results from the household goods group, broker Jefferies said.Reckitt, whose products include Cillit Bang, Nurofen and Strepsils, on Monday said first half net revenue at constant exchange rates rose 3% to £2.3bn on a similar rise in underlying operating profit to £1.08bn.The group also said it was planning to pursue a de-merger of RB Pharmaceuticals with a separate UK listing.Jefferies said the company's earnings and margins were better than expected and the group's performance in Europe and its outlook were positive.But it said the group's failure to match speculation by coming up with more concrete plans for the drug business, such as selling it, was disappointing."This feels like an anti-climax to us," Jefferies said, keeping its 'hold' recommendation and 5000p price target on the stock.Hargreaves Lansdown also said the market viewed the stock as a firm 'hold'."Given reducing revenues and growth uncertainties for the pharma business, a trade buyer looks to have remained elusive, with a stock market listing the natural, if potentially more fraught, alternative," Hargreaves said.AB