Banks dominated the major stock market news this week, with Standard Chartered initially rising on speculation that George Osborne would alter the banking levy, then falling when this failed to materialise.
However, it was the chancellor’s announcement that the government would sell out of RBS that really stirred the share-tippers this week, provoking polarised responses.
Away from RBS, drinks giant Diageo attracted the most attention after takeover speculation began to surface.
Tuesday
Diageo – Sell/hold
There were mixed views on drinks giant Diageo this week following talk of a bid from private equity firm 3G Capital. Tempus recommended investors avoid the stock, pointing out there were many obstacles to the deal being completed. The column said details of the bid didn’t square with the usual style of 3G. It also highlighted speculation that the move could be fuelled by a joint bid including Anheuser-Busch InBev, saying this was unlikely as it would require AB to cut dividends.
Questor was slightly more upbeat about the stock however, saying that lacklustre sales and falling profits make Diageo a solid bid target at some point. It also said the bid made sense in a sector rife with consolidation, adding that with free cash evaporating and stock overhang issues, Diageo isn’t in the best position to defend itself either.
It also highlighted the 3.1 per cent dividend yield and said the rise in the share price after the bid speculation only put the company back at fair value, after a woeful 12 months that saw more than 8 per cent wiped off its share price.
Performance of Diageo shares over 1yr
Source: FE Analytics
Wednesday
RPC – Buy
On Wednesday, Tempus tipped RPC as a long-term play. The packaging company supplies everything from cosmetics cases to plastic tubs for household paint from DIY stores.
It has the ability to repeatedly grind out ever-higher revenues and profit margins through acquisitions and, unlike many other cross-border entities, it has found higher exchange rates have been offset by falling raw material prices. Shares are up by approximately 30 per cent since October, which has hit the dividend yield, now down to 2.4 per cent. However, its 14-times earnings make this one for the future.
Energy Assets – Buy
Questor tipped Energy Assets, a manufacturer of smart gas and electric meters, which reported positive news across all key metrics on Tuesday. It has a simple business model – it buys smart meters, installs them, then charges an annual fee for use. The capital cost is recovered after around eight years, but the product will typically last 20. Rental fees are assured by names such as British Gas and there appears to be more growth potential in the future.
Thursday
Sainsbury’s – Sell
Tempus recommended investors avoid Sainsbury’s, despite the fact it posted slightly better-than-expected results on Wednesday. Sales volumes are ticking higher, but food-price deflation is still biting. Discounting is being reduced and cost saving measures are kicking in, but a dividend-cut is likely and discount rivals such as Lidl and Aldi aren’t going to give up the fight any time soon. With shares trading at 12-times earnings, Tempus said now is not the time to wade in.
RBS – Sell
Questor said investors should sell RBS. The government’s 79 per cent stake in the bank is set to be sold at a discount, but the stock has underperformed peers and the market as a whole since the start of the year. It is unwinding global assets and this is being done with the market in a robust mood, so it is achieving good prices. However, there are legacy regulatory issues in the US where mortgage mis-selling fines are expected, while European regulators are expected to hit the bank off the back of the forex rigging scandal. Until the scale of these liabilities is clear, it achieves a stronger capital position and starts paying dividends, the column concluded there is too much risk here.
Friday
RBS – Buy
A day later, Tempus took a decidedly more upbeat view on RBS. There is no shortage of unknowns regarding the government’s declaration that it will start selling its 79 per cent stake in the bank and assuming the retail offer comes with a loyalty bonus along the same lines as the one seen with the TSB float, the temptation may well be to sit on the sidelines until this materialises. However, the bank has some positive exposure to the expanding UK economy and there are more cost-savings to be made, so even with the threat of more regulatory fines, Tempus said this has the potential to make for a sound investment. Any retail give-away is probably still worth considering, but the column found few reasons not to like the stock right now.
WS Atkins – Hold
Questor said investors should hang on to WS Atkins. The prospect of a swathe of infrastructure spending sent shares soaring recently, with good cash generation and a strong dividend policy helping lift sentiment, too. The dividend yield of 2.4 per cent is growing at a healthy rate, and Questor said this is sustainable due to the current round of government spending we are now seeing.
The payouts are also covered more than two-fold by free cashflow and earnings. Despite the recent share price gains, WS Atkins still only trades at a multiple of around 14 times and with a strong balance sheet, this is marked as a steady performer.
