Broker tips: Petrofac, Sainsbury's, JD Sports
Petrofac got a boost on Wednesday as Kepler Cheuvreux upgraded the stock to 'buy' from 'hold' following a drop of around 20% in the share price since it last downgraded the company.
Kepler attributed the drop in the share price since mid-May to uncertainties around the start-up of the Duqm project in Oman, failure to issue a $300m bond and speculation around a potential lack of liquidity and upcoming capital increase.
However, it said Tuesday's first-half trading update was "reassuring" and it's now happy to jump back in on Petrofac.
It noted that Petrofac received the full notice to proceed on the Duqm refinery this month, while management confirmed it expects the E&C business's net income margin to be 7-8%, versus Kepler's estimate of 7.1% for 2018, meaning that the delay did not weigh much on the company's earnings.
In addition, net debt is under control and there is no need for new equity, Kepler said. "Net debt is said to be close to $0.9bn at the end of June and should decline in H2, thanks to working capital movement," it said.
Kepler also highlighted "huge" commercial opportunities for the second half, with $1.8bn of orders secured year-to-date and bookings close to $2.2bn including the potential Majnoon contract in Iraq.
Barclays said it had long thought that a merger of Sainsbury's and Asda made sense, but while the question as to whether or not competition remedies would render the proposed deal "uneconomic" remained, analysts have upgraded their rating on the FTSE 100 supermarket.
With the Competition & Markets Authority's decision likely to remain unknown until mid-2019, Barclays remained sceptical about store disposals being highly material given that both companies have taken extensive advice and were continuing to invest "considerable credibility" into the transaction.
However, having had more time to run the numbers and explore alternative scenarios, the bank's analysts chose to upgrade Sainsbury's to 'overweight' from its previous 'equal-weight' stance.
Barclays assumes EBITDA synergies of a little over £500m by year two, in line with the retailer's guidance, but noted that, just as importantly, it now forecasts that Sainsbury's core EBIT margins will "drift downwards modestly" and that ASDA's margins will fall by a further 60bps ahead of the merger.
"We believe Sainsbury is worth 400p per share on a merged basis and 285p on a standalone basis," said Barclays.
Assuming an 80% chance of the merger's success, Barclays raised its target price on the grocer from 300p to 375p.
Broker Peel Hunt highlighted material upside potential from retailer JD Sports following its "transformational" acquisition of US group Finish Line.
Peel Hunt feels that, in a world where brands are increasingly going for "direct to consumer" sales models, relationships with players like Nike and Adidas aren't just important, they are "life and death" and that while industry sales growth has remained solid, direct to consumer targets have meant that something has to give with retailers.
However, analysts Jonathan Pritchard and John Stevenson said that JD was perceived as a "hot" format, which the big brands hope it can use to "breathe some life" into the somewhat subdued Finish Line, even if it takes time.
They see Finish Line as a crucial piece in JD's "global jigsaw", especially having travelled over to the US to look at some of the Finish Line stores and been "excited" by what they discovered.
"The flagship stores have access to some crucial lines, but not enough, and staff densities could be better: JD is buying a business that could generate much higher sales and EBIT densities if it improved some retail basics," the analysts said.
JD Sports shares are a "clear buy", the pair said, noting that while UK retailers had failed in the US before, JD will bring "financial clout and deeper brand relationships" to a workable store portfolio that is seen as likely to succeed Stateside.
"The shares don’t reflect that," they said as they upped JD's target price to 525p from 500p.