Broker tips: RBS, De La Rue, Telecom Plus

23rd Nov 2010 13:20

UBS thinks risk aversion has seen the shares of the Royal Bank of Scotland (RBS) underperform, but reckons the market might have overreacted to the bank's exposure to the Irish crisis.With worried investors shying away from many banks that have exposure to Ireland, RBS shares have taken a hit over these concerns. However, the broker says that RBS's £50bn of Irish exposure is "manageable".Though it will be some time before the benefits of restructuring become evident and the group is able to reduce dependence on the support mechanisms put in place in 2009, the stock is attractive at current values, the broker says.RBS is lifted to a 'buy' from 'neutral', despite the broker cutting the target price to 47.5p from a prior 56p.Uncertainty surrounding bank note volumes and margins on new orders has prompted Panmure Gordon to retain a 'sell' for bank note printer De La Rue.While the broker has yet to review its forecasts, it suggests that the full-year outlook remains negative.The broker remains cautious over the resolution of paper orders after De La Rue experienced problems at a paper production site.While profit impact from paper problems were in line with broker expectations at £12m, the first half operating profit of £27.8m was significantly lower than the £51m reported last year.The broker says that the outlook is "very uncertain to be frank - with a number of important questions still to be answered: will bank note volumes return?...will deliveries to the Bank of Ireland resume?...and what will the knock-on effect on margins for new orders be?"The broker has a 529p target price and a 'sell' recommendation for the stock. Broker finnCap sees rising gas prices coupled with a cold winter leading to improved margins at Telecom Plus, despite the group's interim performance being below expectations.Revenue for the utility and telecoms supplier was 3% below the broker's forecasts coming in at £147m, while earnings before interest, tax, depreciation and amortisation stood at 9% under estimates."Nevertheless, gross margin outperformance, and prospects for revenue uplift in the second half, generate optimism for full year numbers", says analyst Andrew Darley.Darley observes that when gas retail prices rise the inflation can generate a period of supernormal margins, and so when accompanied with a cold winter it will enhance gas consumption "maximising the benefit of those temporary margin bursts". However, the broker notes that the group's cash weakness was surprising at the recent trading update.The broker considers Telecom Plus a yield stock, estimating a dividend of 23p for the full year. At a 6% yield target, finnCap sticks with a 'hold' at a 380p target price.