Broker tips: Petra Diamonds, Echostar, Topps Tiles
RBC Capital Markets had upped its stance on Petra Diamonds to 'outperform' from 'sector perform' following its $178m rights issue.
RBC said the rights issue has provided a crucial derisking for the balance sheet and given the company a clearer path through the key ramp-up phase.
The bank's forecast suggests net debt/EBITDA will now be below 2x through calendar 2019. However, the biggest improvement is the step change in the equity story that comes from bringing the balance sheet forward by nearly three years.
"This relief allows Petra to focus on operations, and to finally move the Cullinan cave toward planned volumes and cash flow. This reduction of balance sheet risk sees our target multiple move to 0.9x NAV from 0.8x. The improved balance sheet should also increase long-term diamond price optionality attributed by investors now that financial risk has been reduced."
In addition, RBC argued that diamond market exposure over the next 12-24 months is compelling due to strong exposure to the US versus other commodities, both from better growth and domestic tax cuts and supply growth moderating with De Beers and Alrosa pulling back on volumes in 2019.
"We believe the diamond sector has sound long-term fundamentals, and Petra should have a growing production profile. In addition, the Cullinan mine holds the prospect of increased production of special stones.
"Petra is completing an extended capex programme, which should deliver significantly higher margins per tonne of ore processed."
RBC cut its price target on the stock to 65p from 80p.
Elsewhere, RBC Capital Markets reiterated its 'outperform' rating on US satellite company Echostar following news that the firm was likely to make an initial offer of around 650p a share for London-listed rival Inmarsat.
RBC said there is a "very high" probability that Echostar - which has until Friday to make a formal bid for Inmarsat or face a six-month ban - will make an offer.
RBC argued that Echostar would gain nothing by delaying the process six months and would risk either a White Knight or other bidder, and/or losing the battle for Ligado by the time it gains control of Inmarsat.
"Failure to make a formal bid would result in a six month delay. While the share price would be very likely to fall immediately, it may well recover substantially in the following six months especially if Inmarsat can pull off the Chinese deal, or Ligado were to gain approval," RBC said.
It added that if that were the case, Echostar's chairman and co-founder Charlie Ergen may lose the opportunity to purchase Inmarsat.
"In any case, he would have wasted six months and would then be starting at the same point he is now. A rival bidder could use the six months to manoeuvre itself into pole position, or act as White Knight to Inmarsat. Furthermore a six month delay (plus the time to bid again), may mean the battle for Ligado has already played out by the time Echostar gains control."
The bank sees a 60% probability of an initial offer of 650p a share, 20% chance of a "low-ball" offer of less than 600p and 20% probability of a "knockout" offer. Ultimately, however, it reckons that Echostar will need to offer up around 750p to gain any board or shareholder approval for a deal.
"Given the political backdrop (sensitive satellite infrastructure) we believe Echostar is likely to need a recommended offer as a hostile bid could allow the company to seek political protection," it said.
Inmarsat shares rocketed last month after the company confirmed it had received and rejected a "highly preliminary" takeover proposal from Echostar on the basis that it "very significantly" undervalued the group. Since then, it has emerged that Echostar has taken a 3% stake in Inmarsat and a 10.4% stake in its convertible bonds.
Broker Liberum trimmed its forecasts for Topps Tiles on Wednesday, saying the retailer's cautious outlook had highlighted some weakening in recent weeks.
Liberum said Topps' third-quarter trading statement had reflected the tough market conditions seen across the retail sector as a whole.
While like-for-like sales were only down 2-3%, combining this with slightly more prudent store opening and gross margin assumptions, analysts opted to lower their pre-tax forecasts by roughly 5% across Topps' next two trading years.
However, the analysts noted that while there was "clearly" uncertainty surrounding market conditions for the remainder of the year, good cost control should provide Topps with some support moving forward.
"We also believe Topps' leading, specialist market position leaves it better placed than its rivals to weather the softer trading conditions," they said in a note to clients on Wednesday.
"We do not see any change in the positive longer-term fundamentals and, with the group trading close to its a 5-year historic low PER, we see good value for those willing to look past the shorter-term."
A 'buy' rating was reiterated on the shares, but the target price was cut to 90p from 95p.