The Expert View: RBS, Halfords and ITV

Our daily round-up of analyst recommendations and commentary, featuring RBS, Halfords, ITV, Interserve and Aveva.

Key stats
Market capitalisation	£152,076m
No. of shares out	57,236m
No. of shares floating	52,735m
No. of common shareholders	not stated
No. of employees	142800
Trading volume (10 day avg.)	11m
Turnover	£21,410m
Profit before tax	£-2,044m
Earnings per share	-18.89p
Cashflow per share	-1.30p
Cash per share	139.26p

*Correct as at 15 Oct 2012

Shore Capital warns RBS could face dividend ban again

Gary Greenwood, analyst at Shore Capital, has warned that Santander’s decision to withdraw its £1.65 billion offer for 316 Royal Bank of Scotland (RBS.L) branches highlights the challenges RBS still needs to overcome as a legacy of its 2008 taxpayer rescue.

Greenwood said the disposal isn't a big deal in financial terms as despite being highly profitable the branches account for just 2% of total core tier-one capital.

However, the disposal was mandated by the European Commission as part of the bank receiving state aid, which could lead to more problems. 'With fresh expressions of interest in buying the business understood to have been received from various sources, including Virgin Money and JC Flowers, a future sale remains a possibility, albeit we would expect any offers received to come in well below the book value of £1 billion,' Greenwood said.

Greenwood said an extension of the deadline for the disposal may still be required, and he warned this could entail more sanctions - possibly an extension of the recently expired ban on dividends.

Shares in the group, for which Greenwood has a 'hold' recommendation, closed at 267.9p on Monday, down 3p or 1.11%.

Key stats
Market capitalisation	£638m
No. of shares out	199m
No. of shares floating	198m
No. of common shareholders	not stated
No. of employees	12051
Trading volume (10 day avg.)	2m
Turnover	£863m
Profit before tax	£68m
Earnings per share	34.05p
Cashflow per share	46.99p
Cash per share	6.72p

*Correct as at 15 Oct 2012

UBS downgrades Halfords to 'sell'

Adam Cochrane, analyst at UBS, has downgraded car and bike maintenance shop Halfords (HFD.L) from 'neutral' to 'sell', saying the valuation of the shares in comparison with other UK retail shares isn't justified.

The analyst's downgrade follows an impressive set of second-quarter results in which every segment of the business beat forecasts. Like-for-like (LFL) retail sales were up 4.6% year-on-year, while LFL sales in the group's Autocentres rose 12.6%.

Cochrane said these strong results show the group is not a structurally flawed business. 'Halfords’ biggest competitive advantages lays in convenience and service, and we believe it needs to focus on these to remain relevant to the customer,' he added.

However, comparing Halfords to Next, Debenhams and WH Smith the analyst said the shares look unjustifiably expensive, with a further earnings upgrade already reflected in the price.

Shares in the group closed at 321p on Monday, down 6.2p or 1.89%.

Key stats
Market capitalisation	£3,674m
No. of shares out	4,035m
No. of shares floating	3,603m
No. of common shareholders	not stated
No. of employees	3958
Trading volume (10 day avg.)	12m
Turnover	£2,140m
Profit before tax	£247m
Earnings per share	6.20p
Cashflow per share	8.10p
Cash per share	20.60p

*Correct as at 15 Oct 2012

Westhouse initiates ITV coverage with 'buy' recommendation

Roddy Davidson, analyst at Westhouse, has initiated coverage of broadcaster ITV (ITV.L) with a 'buy' recommendation, saying a strong management vision is resulting in tangible progress.

Although he acknowledged that ITV’s transformation remains a work in progress, Davidson said ITV is shaping up both operationally and financially.

'ITV is undergoing a period of fundamental change in response to trends in media consumption, growing competition and a desire to reduce its reliance on advertising,' he said.

'We would particularly highlight solid performance against key performance indicators and a dramatic improvement in the group’s finances which has seen it move to a net cash position, address its pension fund deficit, reinvest substantial cost savings and showcase strong cash generation.'

Davidson has used a discounted cash flow model to arrive at a target price for the shares of 105p. 'This suggests that despite a period of outperformance, the group’s stock remains attractively valued,' he concluded.

Shares in the group closed at 91p on Monday, up 1.45p or 1.62%.

Key stats
Market capitalisation	£475m
No. of shares out	127m
No. of shares floating	121m
No. of common shareholders	not stated
No. of employees	20308
Trading volume (10 day avg.)	0m
Turnover	£1,848m
Profit before tax	£58m
Earnings per share	44.66p
Cashflow per share	74.07p
Cash per share	36.64p

*Correct as at 15 Oct 2012

JP Morgan lifts target price for Interserve on PFI stake sale

Victoria Prior, analyst at JP Morgan, has increased her target price for Interserve (IVR.L) on news the construction company has sold some of its public finance initiative (PFI) investments at a profit of some £60 million.

The group sold 49.9% of the equity and 62% of the debt instruments of two subsidiaries, which between them own 19 of its 22 PFI investments.

'We see this as supportive of its strategy to generate value from PFI that can be reinvested in potentially higher returning operational assets,' Prior said. 'We forecast InterServe will move into a net cash position at the end of 2012 as a result of this transaction.'

Although chancellor George Osborne described PFI as 'discredited' while in opposition, the treasury has approved more than £6 billion of new projects since the coalition came to power.

Prior's sum of the parts derived target price moves from 440p to 460p.

Shares in the group closed at 374.3p on Monday, up 1.3p or 0.35%.

Key stats
Market capitalisation	£1,389m
No. of shares out	68m
No. of shares floating	67m
No. of common shareholders	not stated
No. of employees	1055
Trading volume (10 day avg.)	0m
Turnover	£196m
Profit before tax	£40m
Earnings per share	58.73p
Cashflow per share	66.97p
Cash per share	72.01p

*Correct as at 15 Oct 2012

Merchant Securities raises Aveva's target price

Roger Phillips, analyst at Merchant Securities, has increased his target price for software services company Aveva (AVV.L) following an encouraging interim trading update.

The statement said trading has been solid, and the company expects to report good revenue growth in the first half over the same period last year, despite the impact of adverse foreign exchange rate movements.

'At first glance the shares look very pricy on 23x 2013 enterprise value/net operating profit after tax, but earnings analysis does not ascribe a value to the Enterprise Solutions division given it is (broadly) forecast to break even in 2013,' Phillips said.

'Assigning a 2013 5x enterprise value/sales multiple for Enterprise Solutions (about £158 million) and adjusting out cash suggests the underlying design tools business is now rated at about 19x 2013E.'

The analyst's target price rises from £19 to £22.

Shares in the group closed at £20.36 on Monday, up 46p or 2.31%.