Broker tips: RBS, DSG, Micro Focus

25th Jun 2009 11:21

Royal Bank of Scotland, a day after The Banker magazine named it the worst performing bank in the world during 2008, has been given a boost by broker Cazenove, which has turned positive on the bank.Subscribing to the "less is more" dictum, Cazenove says the appeal of Royal Bank of Scotland (RBS) is that it intends to reduce in size, and it has plenty of assets outside its UK heartland that it can, and will, offload.Cazenove has shifted its rating of the shares, moving from "underperform" to "outperform"."On a balance sheet one-third smaller, we estimate potential earnings [per share] of 6.5p without assuming a full recovery in net interest margins," Cazenove said. The broker believes that the share price could return to 60p, a level not seen since December of last year, although with the outlook for UK banking uncertain the broker declined to put a time scale on its price target."If consolidation of the industry and tighter regulation lead to a less competitive market, the earnings potential can be materially higher. That potential combined with the reduction in risk from reducing the balance sheet are the key attractions of RBS," the broker concludes.A 78% slump in full-year underlying profit has not been enough to deter Oriel Securities from singing the praises of consumer electricals group DSG International, which it reckons is pulling ahead, albeit in difficult markets."The store renewal programme is continuing to perform well with uplifts in gross profits of 11% to 65%. Since the close of the period, when the company had 63 stores in the new format, a further 19 stores have been reformatted and a further 101 reformatted stores are due to be opened this year," Oriel notes.As per its major UK rival, Comet stores owner Kesa Electricals, DSG is expecting the current financial year to be a tough one, but Oriel believes Thursday's trading update from the PC World and Currys owner offered cause for optimism. The broker has reiterated its "buy" recommendation, despite the shares trading on a "punchy" multiple of 26.9 times projected April 2010 earnings.Oriel believes the current financial year represent a trough in the earnings cycle and there is a possibility of earnings upgrade as the year progresses. Legacy software replacement specialists Micro Focus delivered full-year results ahead of pre-close period guidance, prompting broker KBC Peel Hunt to reiterate its recommendation to buy the shares."Our FY10 forecast, pre the acquisitions, was for 6% revenue growth and EBITDA [earnings before interest, tax, depreciation and amortisation] margins of 40.5%. We are upgrading by 3.5% to 44.85c, PBT [profit before tax] $128.44m, based on 42% EBITDA margin in Micro Focus ex Compuware," the broker said, adding that the acquisition of Compuware has been included in its 2010 forecasts but the proposed purchase of Borland has not."The current share price still takes a conservative view of the acquisitions. Micro Focus paid a good price for both and could enjoy significant strategic and financial upside from a successful integration," KBC believes.