Broker tips: RBS, water companies, Wolseley

Initial response to Thursday's results from Royal Bank of Scotland (RBS) was generally positive, but the figures have not made a believer out of JP Morgan.

The US investment house is advising its clients to remain underweight in the part-nationalised lender after loss before tax at £6.2bn came in a little better than JP Morgan's forecast of £6.3bn.

Retail banking performance was in line while corporate banking came in better than expected, JP Morgan (JPM) reckons. The outcome at the Global Banking and Markets division was better than expected. 'Underlying revenues came in at £1.8bn vs. £2.1bn in Q3, a 14% decline which is significantly better than the industry average,' JPM notes.
Fellow US bank Citigroup was a little easier to impress, and reckons the figures should 'drive consensus upgrades with a decent read-across for Lloyds on margins and CRE-related [commercial real estate-related] losses.'

Now that the haggling with the regulator over price controls is out of the way Royal Bank of Scotland has been poring over the numbers for the water sector and concludes that there is value to be had.

RBS analyst Ian Turner said in a note initiating RBS's coverage of the water sector that price control by water regulator Ofwat was 'tougher than was hoped for' but 'efficiency targets have been relaxed between draft and final proposals and investment over the next five years will be £22bn for the whole industry, about 7% higher than the spend in 2005-10.'

Predatory activity is not unknown in the sector and with most players trading below or marginally above their regulatory asset base valuations, by RBS's calculations, there is scope for more consolidation. RBS doubts, however, that take-out prices will be at a 30% premium to RAB that have been seen in the past.

'We are initiating coverage of the UK water sector with a Hold rating on Pennon (price target 570p) which trades at small premium to its RAB, on our estimates. We have Buy ratings on Northumbrian (price target 310p), Severn Trent (price target 1,500p) and United Utilities (price target 680p). We estimate that the latter two trade at small discounts to their RABs,' Turner concludes.

With five months of the financial year still to run plumbers merchant Wolseley felt confident enough to raise its earnings guidance for the first time in three years, which suggests that gross margin pressure at US unit Ferguson is not accelerating, UBS believes.

The Swiss bank is looking for the unveiling of the new chief executive's strategic review on 22 March to provide a catalyst for the share price.

New boss Ian Meakins 'will highlight what is core, what will be slimmed down and what may be sold in due course,' UBS predicts. 'We also expect the group to set out medium term margin targets which are critical for the mid cycle.'

Responding to Wolseley's 10% increase in earnings guidance UBS has bumped up its price target from 1585p to 1723p. Its 'buy' recommendation remains unchanged.