Broker tips: RBS, Anglo American, BHP, Kainos

Analysts at Berenberg lowered their target price on retail bank The Royal Bank of Scotland from 340p to 280p on Wednesday after management conceded that the lender was now unlikely to achieve a 12.0% return on tangible equity by 2020.

Berenberg said that despite a challenging environment, RBS' strategy was delivering "profitable growth, meaningful cost reductions and substantial capital returns".

But the German bank pointed out that for many investors, this was simply "not enough". In particular, Berenberg said many were struggling to look beyond the current margin pressure, which had prompted RBS' board to accept that it would most likely be unable to meet its return on tangible equity targets in time.

The broker's analysts reduced their full-year 2020-21 EPS estimates for RBS by approximately 6%, mainly driven by lower net interest margins, compounded by lower expected buybacks. Berenberg's 2019 estimates, on the other hand, did rise modestly, but only reflecting non-operational effects.

"Following these adjustments, we believe consensus EPS estimates remain 4-6% too low," said Berenberg.

However, while disappointing, Berenberg believed the share price reaction to the news had been "too severe", particularly considering RBS' double-digit dividend yield.

"We believe RBS is able to deliver a double-digit dividend yield, alongside share buybacks of circa £3.0bn over three years. However, these prospective returns are being ignored," they wrote.

Berenberg, which reiterated its 'buy' rating on the group despite the target price cut, highlighted that RBS' efforts to bolster returns and offset revenue headwinds saw operating costs fall by roughly £170.0m during the first half.

Guidance from the lender that full-year restructuring costs should be towards the lower end of the previously guided range of £1.2bn-1.5bn provided the analysts with further comfort.

Deutsche Bank revised its ratings on London-listed miners on Wednesday as it said stocks were due a rebound after the summer selloff.

"Like most cyclical sectors, mining corrected sharply through the summer months," it said. "Risk appetite has collapsed and global growth fears are back at the forefront. While uncertainty and macro risks are high, we see scope for a tactical rebound on a six-month horizon."

DB added that iron ore prices have reset to more realistic levels and valuations are now someway below its mid-cycle targets.

"Our mining valuation composite is now sending a clear buy signal; buying at current valuation levels has yielded an average six-month return of 23% and the sector has moved up in relative and absolute terms on every occasion," it said.

"The pervasive fear in the market is that we enter a 2015 type slowdown which saw negative China and global steel demand for several quarters. While we expect a deceleration in China steel demand in the year ahead (2% in 2020 from 5% in 2019) we think a 2015 style slowdown is an overly pessimistic scenario."

The bank said Anglo American remains its top pick. "The business is well diversified, valuation compelling and, at the current share price, the market is getting the 30% growth by 2022E almost for free."

Deutsche upped its stance on BHP Group to 'hold' from 'sell', cutting the price target to 1,750p from 1,900p following the recent share price correction.

"Our view that BHP lacks structural growth drivers is unchanged, however, capital discipline is holding and dividend levels should remain robust through the cycle," it said.

Analysts at Canaccord Genuity reiterated their 'buy' recommendation for the shares of Belfast-based software manufacturer Kainos on Wednesday, stating that recent weakness in the group's shares appeared to be the result of investor concerns about government spending.

Canaccord said Wednesday morning's trading statement from Kainos confirmed this but also highlighted "strong demand" for its enterprise services, Workday implementations and software, with management expecting to meet market expectations for the full-year.

The Canadian broker also said Kainos' comments on soft government spending tallied with its proprietary data tracker, which suggested a slowdown in new contract awards over the past six months.

But in any case, Canaccord highlighted how non-government revenues "should" continue to grow at a compound annual growth rate of around 20%, driven by strong demand for enterprise digital transformation work and the success of Workday, and thus more than offsetting weaker government delays.

"We leave FY20 estimates largely unchanged but tweak FY21 & 22 revenue estimates 1% to 2% lower to reflect more muted government momentum," said Canaccord, which also dropped its price target on the group's shares from 660.0p to 620.0p.

"In light of expected 10% revenue and 14% EPS FY19-22 CAGRs coupled with low single-digit upside potential to consensus, the recent de-rating of the shares towards the lower end of the peer group seems overdone to us.

"We hence see an attractive buying opportunity for SMIDCAP investors wanting exposure to the secular growth themes of enterprise and government automation and Workday adoption."