Broker tips: British American Tobacco, Capita, RSA

27th Feb 2014 15:50

British American Tobacco delivered fiscal year 2013 results which were basically in line with consensus estimates, although the company faces several headwinds. The company did, however, manage to raise its adjusted operating margins by 100 basis points to 38.1% despite 3% volume attrition and macroeconomic weakness in Asia, analysts at Canaccord Genuity wrote to clients on Thursday. However, costs were expected to come under pressure with the European Union's Tobacco Product Directive requiring numerous packaging changes. More fundamentally, the broker was now more convinced that the firm, and its peers, should be valued using a higher 'beta' - a measure of a stock's riskiness relative to the market based on past correlations - given the advent of electronic cigarettes. It was impossible to predict what impact they will have although they are certain that it will lead to pressure on margins, Canaccord said. Furthermore, they believe that the buy-out of Reynolds American would not meet some investors' expectations for earnings enhancement. That was because Reynolds' key brands overseas were in fact the property of Japan Tobacco and the regulatory environment in the US remained difficult.On the basis of all of the above, they decided maintain their 'sell' recommendation on the shares while at the same time reducing their target price to 2,900p from 3,000p.Outsourcing outfit Capita released "impressive" full year results, Investec said. The broker highlighted the company's strong rate of organic growth and its "very impressive" win rate. In fact, at 2 out of 3 the company managed its highest ever rate for the former.That is quite important given Investec's difficulty in trying to determine where the next major catalyst would come from and what with the shares trading on a price-to-earnings multiple of 18 times' its estimated fiscal year 2014 profits. Nonetheless, the analysts wrote that "it is also difficult not to be impressed with the quality of earnings".Other positive aspects of the firm's full-year financials included the strong cash performance, with free cash flow generation rising to £312m.Also, the company's dividend was increased by 13%, which was slightly ahead of their estimates."We continue to like the story, this is a best in class operator but the valuation tempers our enthusiasm. We reiterate our 'hold' but lift our multiples-based target price to 1,100p," Investec concluded. Following Thursday's final full-year results from insurer RSA analysts at Numis moved to lower their recommendation on the shares to 'reduce' from 'neutral'.Particularly important, the company announced its intention to launch a £775m rights issue. That implied a stronger capital base was in process, but the resulting dilution meant that there were now "downside" share price risks. On a more positive note, the broker pointed out that the outfit had already moved to bolster its capital position by £500m via increased reinsurance purchase, the sale and leaseback of the Swedish HQ and sale of the equities portfolio. A further capital inflow of £300m was targeted from selected business disposals. Hence, the required capital had been reduced. As well, the rights issue would likely increase net trading assets per share (NTAps) but in their opinion the revised return on net trading assets (RONTA) guidance, of between 12% and 15%, was insufficient to support the current share price. "We continue to see downside risk and move to a 'reduce' rating [with a price target of 85p] of given recent share price strength," Numis said.AB