Broker tips: RBS, Rolls-Royce, Ferrexpo

14th Oct 2011 12:53

Evolution Securities has reiterated its buy rating and 40p target for part-nationalised lender Royal Bank of Scotland (RBS), saying "don't let the facts get in the way of a good story".The broker emphasises that RBS does not need to raise fresh capital due to the following reasons: a core tier one ratio of 11.1%; 50% write-down of Greek debt in the second quarter; modest sovereign exposures to other PIIGS countries (Portugal, Ireland, Italy, Greece and Spain); elevated but falling impairments; and even a return to profitability in 2012."The flawed calculations used by the European Banking Authority in the discredited July 2011 stress test were largely attributable to ignorance. However, when experienced commentators who should know better then use the EBA mistakes as a starting point for calculations to mischievously suggest that RBS needs to raise fresh capital it is more than disappointing," said analyst Ian Gordon.After putting its forecasts under review yesterday, Evolution Securities has upped its numbers for power systems giant Rolls-Royce following the firm's disposal of its stake in International Aero Engines (IAE), a deal which the broker estimates has a net present value above $3bn.Rolls-Royce is selling its 32.5% stake in IAE - the business which produces the V2500 engine for the A320 Airbus - to Pratt & Whitney for $1.5bn, in addition to further payments for every hour IAE engines are flown over the next 15 years. Evolution says that more than half the value from the transaction will come from these flying-hours payments.After factoring in a £140m improvement in the Civil Aerospace division's operating profit (Rolls-Royce's estimate), the broker raises its group earnings per share forecasts for 2012 by 9.5%. As such, the target price is raised from 720p to 780p. A buy rating is maintained.Ferrexpo, which produces iron ore pellets used for making steel, was one of the high risers on the FTSE 250 at midday after the firm was upgraded from neutral to buy by UBS."Our commodity team remains positive on iron ore, expecting prices to remain high on continued supply constraints from India, with upside risk emerging in November when China's spot trade typically lifts seasonally," UBS said.However, the target comes down from 500p to 440p, which is calculated using a 12% discount rate to net present value ("up from 11% to reflect higher political risk").BC