Market Round-up: RBS leads the way as brokers buy into Stephen Hester’s happy talk

Simon English
15 Mar 2010

Stephen Hester has been making the rounds of the big City institutions and the word from those who've sat in the meetings is that the Royal Bank of Scotland boss is far more optimistic in private than he has been in public. Positively frisky in fact.

Traders reckon that some large investment houses are convinced by his spiel and are working on extremely bullish research notes which could give the shares a tasty nudge.

The incurable optimists at Merrill Lynch are already believers. The broker now owned by Bank of America says recent results showing a loss of merely £6 billion are signs that RBS* is on the up.

The shares in the bank, 84% owned by a government looking to offload a stake bought at 50p as soon as possible, today moved up 1.43p at 44.03p making it the highest gainer in the market.

Its rivals were slipping the other way, with Lloyds Banking Group down 1.14p at 57.33p and Barclays off 4.25p at 347.6p despite, or perhaps because of, rumours that its investment banking arm BarCap is looking to recreate the partnership model that served Goldman Sachs so well in the past.

Deutsche Bank also reckons RBS stock, which went as low as 19p at one point in the past 12 months, is due a good run with 50p a short-term price target.

Retail investors tempted to take a punt should first get hold of a note from Seymour Pierce, titled “New wine poured into old wineskins.”

“We think that consensus expectations for banking income growth is far too optimistic,” warns Seymour's Bruce Packard, who has slapped a Sell on RBS, Barclays and Lloyds.

UK households are still so mired in debt that banks aren't likely to see much profit growth from customers, says Packard, so they will have to rely on the “casino” trading arms for better returns. “Expansive banking strategies almost always end in near collapse,” he adds.

Away from the banks, it was a sluggish session. The FTSE has had a good run of late but struggled for direction today. The leading index followed Asian markets, down 4.8 points to 5620.85.

The biggest faller was mining giant Xstrata, losing 25.5p at 1167.5p. Some directors sold shares last week and the rumour doing the rounds is that the group is looking at a rights issue. “If they are cash strapped, we all are,” said one dealer.

There was a rare friendly call from Citigroup for BT, which added 1.7p to 125p. Citi has put a target on the stock of 150p, arguing that fears about its pension deficit are overdone.

BSkyB fell 7p to 591p as Evolution Securities cut its rating on the stock to reduce from neutral on valuation grounds. The satellite broadcaster's shares rose 5% on Friday after traders gossiped that Rupert Murdoch may take the firm private.

Chipmaker Arm, down 3.8p at 223.4p, and midcap peer CSR, off 11.8p to 472.5p, fell as UBS cut its ratings on both firms to neutral from buy.

Also on the move were the small cap Falkland Islands stocks lately in the news for diplomatic reasons. A report that Desire Petroleum has struck oil sent the stock up 4.5p to 97.7p.

*The writer owns Royal Bank of Scotland shares.

Trader talk

Property hedge fund manager Stephen Ashworth has bought 15.38 million shares or a 3.1% stake worth just under £1.02 million in AIM-listed property investment company Real Estate Investors.

Ashworth manages the Iceberg Alternative Real Estate Master fund and his investment comes hot on the heels of an upbeat preliminary results announcement for 2009 from the West Midlands-based property group. It reported an 8% increase in rental income on to £3.2 million and a £4.3 million net profit, up significantly from the £15.7 million loss it reported in 2008. It also said gross property assets were valued at £54.8 million, up from £48.5 million in 2008.

REI hopes a fundraising of £10.1 million will enable the company to capitalise on market opportunities through this year and next and chairman Peter Lewin said the company had a “positive outlook”.

Tomorrow's agenda

Debenhams posts a trading update tomorrow. The department store group said sales over Christmas were 0.1% higher than the same time a year earlier — not as good as some of its rivals but the group said a shift in strategy to selling more own-brand merchandise meant gross margins were “significantly” higher.

Analysts at Panmure Gordon expect like-for-like sales for the first half of Debenham's year to come in either flat or down 0.5%. Shareholders will have questions to ask about Debenhams's plans for the year ahead — the group has previously said it may buy more stores in Europe, after it acquired Denmark's Magasin du Nord chain in January.

Security business G4S updates shareholders with preliminary results. Analysts expect a strong set of results, with stable revenue growth. Killik says the firm is benefiting from the trends of outsourcing security protection —which is likely to accelerate in the UK when public sector belt-tightening kicks in after the election.

Portfolio

BUY: GLAXOSMITHKLINE
Splash out on shares in Britain's biggest pharmaceuticals firm, GlaxoSmithKline, say analysts at Panmure Gordon. It says a meeting by America's industry regulators the FDA about the much flagged-up risk of Glaxo's asthma drug Advair was “much ado about nothing” and gives the stock a 1400 price target.

SELL: LUMINAR
KBC Peel Hunt says there is no lift in the “appalling” trading record of nightclub operator Luminar in recent months and names the stock a sell. “Although the move towards cost-base savings is sensible, that alone will not turn the business round,” analysts say. They conclude that Luminar shares are “best avoided”.

HOLD: HOME RETAIL GROUP
Hang onto shares in Argos and Homebase-owner Home Retail Group says Citibank. It admits adverse weather and a catalogue launch which was later than last year hit sales at Argos and it reckons that UK consumer spending will “stagnate” this year. It names a 290p target price.