Broker tips: Burberry, Centrica, SSE, RBS

9th Mar 2016 14:38

(ShareCast News) - A weaker sterling will add to ,'s growth on both the top-line and bottom-line, but the recent rebound in the share price was "unwarranted", HSBC said.Neither should investors expect anything more than excess cash to be returned and room to cut costs further was limited, analysts Antoine Beige, Erwan Rambourg and Anne-Laure Bismuth said in a research note.Recent weakness in the pound would "mechanically" add 4% to sales and tack on another 10% to the fashion retailer's earnings before interest and tax, they said.Remarks from Burberry boss Christopher Bailey that the company was "addressing how to optimise its capital structure" pointed to a willingness to return excess cash flows, equivalent to about £120-£150m per year, or approximately 2.0% of market capitalisation, rather than eating into its net cash position.HSBC estimated the latter would stand at £673m by the end of the fiscal year 2016, in March.On the back of all of the above the broker marked up its estimates between 2016 to 2018 by between 2.0% and 10%, but pointed out how currency movements alone had an impact of between 2%-7%, which was "significantly less than the share price movement"."We believe the excessive de-rating of the stock has now been corrected."Shares in the iconic fashion retailer were trading 18.4 times HSBC analysts' estimates for earnings per share for calendar year 2017, versus 16.7 times for LVMH and 15.0 for Richemont.HSBC downgraded its recommendation on the stock to 'hold' from 'buy' but upped its target price to 1,500p from 1,380p.Utilities Centrica and SSE were among the top performers on the FTSE on Wednesday morning after JPMorgan Cazenove upgraded its ratings on the stocks.The bank said UK merchant utilities have been buffeted in recent years by a number of headwinds, with energy consumption down, structural oversupply driving a collapse in commodity-based earnings, and interventionist regulation and policy settings muddying the waters.But the bank reckoned the cycle was turning."The CMA's energy markets review will imminently conclude, reducing regulatory risk; generation markets look set to tighten and a proposal has been tabled to repair the capacity market."Underlying structural risks undoubtedly remain, but we see constructive evidence of earnings stabilisation."As a result, it lifted SSE to 'overweight' from 'underweight' and upped the price target to 1,550p from 1,280p. The bank also upgraded Centrica, to 'neutral' from 'underweight', keeping the price target at 230p.JPM said it prefers SSE's "defensive, cash-generative business mix", which underpins a sustainable cash-covered RPI-linked 6.3% yield."With energy supply risks receding, support for gas-fired generation in the works and spark spreads improving we see potential upside to our 15% total return expectations," it said.On Centrica, it said that if commodities continue to recover, its significant operating leverage presents upside risk to the bank's current estimates.JPM remained 'neutral' on Drax but cut the price target to 260p from 370p, highlighting uncertainty facing UK coal-fired generation in the current political and commodities environment.Berenberg upgraded Royal Bank of Scotland to 'hold' from 'sell', keeping the target price at 250p.It said RBS has a strong core business, a solid capital position and a management team focused on cost-cutting and managing returns. "However, like a Russian doll, RBS's core value remains trapped in a larger, more challenged group."Berenberg reckons the bank's core value may soon begin to emerge as non-core falls from 25% to 15% of risk-weighted assets by 2017."While losses from non-core, conduct and payment of the dividend access share are likely to erode tangible book value further during 2016, we now think this is reflected adequately in the 30% discount to our 2016E TBV."Berenberg said RBS' history of deleveraging and its focus on corporate banking makes it less exposed than peers to more acute competitive pressure in UK retail lending.In addition, it pointed out that while costs in the corporate and investment bank, Ulster and private banking are high, management is focused on reducing these and has a track record of delivering savings.Berenberg expects it will take time for RBS to deliver on these plans, which will lead to some revenue erosion. It expects the core bank to generate 19p of earnings per share and 10% return on equity ROE by 2017."In the short term, the final payment on the government's dividend access share and actions to close the pension deficit are expected to reduce TNAV by around £1.3bn and £1.6bn respectively."Moreover, while recent provisions for civil litigation and PPI redress mean RBS is likely to have passed the peak of conduct costs, these remain a material and uncertain headwind."