Greece Outside In: RBS boosted by buy notes as FTSE 100 rises for second day

Tuesday, July 9, 2013

RBS boosted by buy notes as FTSE 100 rises for second day

Good results from Alcoa lift mining shares while Greek deal also calms investors' nerves

Leading shares gained ground for the second day running, with banks and mining companies among the main risers.

Royal Bank of Scotland rose 15.6p to 304.4p as analysts became more positive on the company. Goldman Sachs moved from neutral to buy, saying a split into a good and bad bank as suggested by the chancellor's recent Mansion House speech could address some of the problems facing RBS, such as muted returns and uncertainty over its prospects.

Ian Gordon at Investec also issued a buy note, but on the basis that a split of RBS was less likely:

It is too soon to declare outright victory, but the government's response to the Parliamentary Commission on Banking Standards, published yesterday lunchtime, struck a more measured, constructive approach. Despite some vociferous support in Parliament, the Commission's more outlandish ideas for breaking RBS up into small pieces have been summarily dismissed. The spectre of a good bank/bad bank split lives on, but it will surely fail to meet the stated preconditions for its implementation. This is very good news.

Overall the FTSE 100 finished 63.01 points higher at 6513.08, helped by news of a short term fix for Greece, with eurozone finance ministers agreeing a $3bn bailout loan after the usual tortuous discussions. On top of that, the IMF lifted its growth forecast for the UK, outweighing disappointing industrial production and trade figures. But in China, inflation rose by more than expected, putting more pressure on the central bank as economic growth shows signs of slowing.

The prospect of declining growth in one of the key economies for commodities has seen mining shares lose around a quarter of their value this year. But they were back in demand on Tuesday following better than expected figures from Alcoa. The aluminium producer kicked off the US second quarter reporting season with a larger than forecast profit and positive comments about future demand.

So miners dominated the risers in the leading index, with Anglo American adding 37p to £12.82, Fresnillo up 30p at 951p and Vedanta Resources rising 86p to £10.94.

Among the mid-caps, iron ore producer Ferrexpo added 16.9p to 155.6p after a positive update showed a 21% rise in output during the second quarter.

Among the other risers Weir added 58p to £21.62 after Morgan Stanley moved its rating from underweight to equal weight with a £21.50 price target. The bank said:

Weir has done significantly better in oil and gas than we expected, and our estimates are no longer markedly different from consensus, despite our lingering concerns on the minerals side. The skew of risk and reward is now balanced.

Reckitt Benckiser rose 73p to £49.23 despite concerns about increased competition for its Suboxone heroin substitute after US regulators gave their approval to rival Zubsolv, from Sweden's Orexo. In a sell note Pablo Zuanic at Liberum Capital said:

[This approval] increases the downside risk to RB Pharma earnings in our judgment. So while we are appreciative of the strategic changes chief executive Kapoor has set in motion in the core business and realize the uncertainty around RB Pharma (myriad of scenarios, reflected in the wide disparity of consensus estimates), we see more risks weighted to the downside and hence our sell stance. However...we expect RB Pharma to produce a strong first half which will not reflect the Orexo challenges yet, which consequently may support the stock for now.

Marks & Spencer dropped 6.5p to 453.2p following news that like-for-like sales had fallen for the eighth successive quarter.

ITV lost 2.6p to 150.2p after the broadcaster's chairman Archie Norman was appointed to the same position at investment bank Lazard London. Earlier Panmure Gordon issued a buy note, following reports the company could be interested in a £90m deal to buy Swedish production business Nice. Analyst Alex DeGroote said:

This would be consistent with the strategy of expanding in TV production, through acquisition. In context, ITV has net cash of around £200m. So there is material upside over the next 18 months from releveraging the balance sheet (e.g. on M&A, buybacks). We estimate ITV has more than £1bn of firepower, without net debt. Hence earnings per share remains in a strong upgrade cycle and the shares must be owned.

Aveva led the FTSE 250 risers, up 310p to £25.78 after the IT group said it had made a positive start to the year in both its engineering systems and enterprise solutions divisions.

Lower down the market Blur, which operates an online marketplace for companies to buy and sell services from advertising to legal help, bounced 40p to 242.5p after a positive second quarter update, a two day gain of 63.5p. It announced its biggest single contract to date, a $3.6m project for a US transport group, and added 410 projects during the three months, the largest number in a quarter. Analyst Tintin Stormont at the company's broker N+1 Singer said:

Blur is seeing strong traction in disrupting the traditional corporate services industry, a market worth $2 trillion. Execution has been strong to date showing the group is successfully building on its first mover advantage. The corporate market is clearly ready for a new model for procuring services and investors should continue to see significant growth going forward from Blur which is at the forefront of this trend.

Finally Keywords Studios is set to become the largest technology float on Aim so far this year. The company, which supplies technical services to the video games industry and counts Microsoft and Electronics Arts as customers, has raised £28m with an institutional placing at 123p a share. The company's market capitalisation is expected to be around £49m, and dealings are due to start on Friday.