Market Report: Red pen for RBS on profitability fears

The City withdrew funds from Royal Bank of Scotland yesterday on concerns it isn’t as profitable as some had hoped.Analysts at Bank of America Merrill Lynch took the red pen to the taxpayer-owned bank on fears of falling margins on mortgages, dividend anxiety in relation to capital-ratio requirements, plus the possible issues of its government-enforced bad bank, US housing claims looming and EU Libor settlements.

All these factors could mean it is a whole lot less profitable than some investors had factored in.

Merrill Lynch has gone a bit cold on most UK banks and also took Lloyds Banking Group off its Europe 1 list but retained its buy rating so its shares slipped just 0.36p to 75.66p.

Royal Bank of Scotland bore the brunt of its “less-positive” outlook. Merrill cut it to underperform with a 325p price target, from 345p – and the shares landed close to the bottom of the blue-chip index, losing 5.2p to 371.7p.

The wider market managed its third day of gains despite disappointment from the US over negotiations on its debt issues. The FTSE 100 rose 20.46 points to 6,507.65.

Alastair McCaig, a market analyst at IG, said: “The City’s traders have become increasingly accustomed to delayed trains and increasingly miserable weather, and judging by the market’s reaction we can also add US political indecision to the list. The move up is more impressive when you consider the lethargy of traders.”

The biggest gainer of the day on the benchmark table was the chemical specialist Johnson Matthey. JP Morgan rated it a buy and predicted new customers in the US and China will create strong growth.

JP’s analysts said that the US shale-gas revolution and new customers from China’s petrochemical expansion will be a boon for the maker of industrial catalytic converters.

JP’s Martin Evans and his team said shares are at “an inflection point” and upgraded it to overweight from neutral.

They added that Johnson has “major potential from a swathe of new global industrial” spending.

The analysts suggested new customers could lead to a 35 per cent jump in the share price, and the rest of the City appeared to agree. It was 166p better at 2,987p, and JP Morgan gave it a whopping new 4,000p price target.

Also in demand with analysts was paper and packaging specialist Mondi. The relative newcomer to the FTSE 100 added 14p to 1,066p when Credit Suisse gave it the thumbs up. Another keen riser was DIY and builders merchant group Travis Perkins, up 85p to 1,763p ahead of its trading update on Thursday. Scribblers at RBC Capital became the latest analysts to rate the stock positively because it is likely to benefit from the Government’s Help to Buy scheme. RBC rated it top pick with a 1,900p price target.

Management changes announced last week at B&Q’s owner Kingfisher got the thumbs-up from Credit Suisse. B&Q’s chief executive Martyn Phillips will leave and Kevin O’Byrne will run B&Q in the UK. Kingfisher’s chief Ian Cheshire will take on Mr O’Byrne’s international responsibilities.

Analysts at Credit Suisse said the “strengthening of B&Q management team” should be “welcomed”. They upped the target price to 440p as shares in Kingfisher advanced 3.6p to 373.8p. Phone companies were in vogue too – the telecoms giant Vodafone completed its takeover of Kabel Deutschland and was 1.75p better at 221.55p.

BT rang up a 5.4p gain to 353.5p as the telecoms group got a boost after an announcement that it will offer Sky movies on its TV service.

Over on the mid-tier table, Talk Talk, run by Dido Harding, added 5.1p to 256.1p amid vague bid rumours and analysts at Macquarie said it was “benefiting from its association with X Factor”.

Royal Mail will begin official trading today but was up another 20p to 475p in conditional trading yesterday.

The engineer Kentz collected 3p to 506p after announcing its appointment in Qatar to the Pearl Gas-to-Liquids project – a joint venture between Qatar Petroleum and Shell.

On Aim, storage group LoknStore reported full-year profit and sales growth and packed in a 7.5p rise to 180.5p.

Oil explorer Urals Energy jumped 1.375p to 8.875p after revealing a bid approach at 12.25p a share last week.

Paragon Diamonds sparkled 0.19p brighter at 6.125p on news it has been granted a mining licence for the Lemphane Kimberlite project in Lesotho.

Buy: MARKS & SPENCER

Snap up shares in Marks & Spencer, Galvan Research suggests. The broker expects “better margins” as the high street retailer has a “strong management team” to address “markdown issues”. Depite its recent issues and downgrades from other analysts this month, Galvan’s researchers rate it a buy with a 505p price target for shares that are currently 475.6p.

Sell: SSE

Flog shares in SSE, JP Morgan advises. The broker is concerned the “public outcry over energy prices” may increase the likelihood of “retail price controls from 2015 and force the current Government to announce new policies to ensure bills remain affordable”. It rates the energy provider as underperform with a 1,200p price target for shares that are 1,442p.

Hold: CHEMRING

Hang on to Chemring, Liberum Capital advises. The broker is concerned about the continued problems at the defence specialist. There are “risks” for the flares and bomb-detector maker and Liberum rates it a hold until management next updates the market in mid-November. It gives it a 205p target price for shares that are 211.1p.