Broker tips: Anglo American, Amigo Holdings, Tullow Oil
JPMorgan Cazenove downgraded its stance on Anglo American to 'neutral' on Wednesday, exiting its three-year conviction 'overweight' on the stock as it highlighted three reasons for the move and recommended a tactical short of Anglo versus longing Glencore into first-half results in July/August.
JPM said three interconnected risks give a poor risk/reward over the next six to 12 months.
"First, Anglo's valuation no longer looks cheap and it is most expensive of the diversifieds on free cash flow yield (2% 2020E) and price-to-earnings ratio (13x). Second, Anglo is at risk of a $0.9bn cut to 2020 EBITDA (-20% cut to earnings) in the event Minas Rio does not receive a required Brazilian tailings permit by YE’19.
"Third, Minas Rio permitting uncertainty is likely to constrain capital returns at H1’19 results on 25th July, which is already weakest of the UK diversifieds."
JPMorgan said it remains positive on miners despite significant re-ratings since December 2018. Its order of preference is Rio Tinto (OW), Glencore (Neutral), Anglo (Neutral), and BHP (UW).
It left its 2,300 price target on Anglo unchanged.
Shore Capital downgraded its recommendation on Amigo Holdings to 'hold' from 'buy' on Wednesday following the surprise departure of the company's chief executive and a recent rally in the share price.
The broker noted that the shares have rallied 57% since it upgraded them to 'buy' on 25 March, largely closing the gap to its fair value of 270p, which does not currently include any explicit impact from potential regulatory change.
"Taking this into account and the surprise departure of the group’s CEO, we think now is a good time to revisit our stance," it said.
The downgrade comes after the company announced late on Tuesday that Glen Crawford was stepping down from his role as CEO this summer in order to seek medical treatment for a spinal condition.
"This is clearly disappointing news for the group and, more importantly for Mr Crawford, who we wish well in his recuperation," ShoreCap said.
The broker also argued that Amigo is currently facing regulatory challenges following concerns raised by the FCA around the guarantor lending industry in March, which were again repeated in a speech by FCA chief executive Andrew Bailey on Tuesday.
"The FCA’s primary concern relates to what it perceives to be a rising number of payments being made by guarantors which may indicate that affordability is not being appropriately assessed by the industry, something that market leader Amigo has categorically denied.
"The group has also seen significant negative commentary from the media in recent months, most notably through a series of articles published in the Times newspaper which question some of its historical business practices."
Analysts at Jefferies kept their 'hold' recommendation and 245p target price on shares of exploration and production outfit Tullow Oil ahead of the company's AGM trading update on Thursday, even as they called attention to Exxon Mobil's decision during the previous week to send two rigs to appraise the Hammerhead discovery, offshore Guyana, labelling it "significant".
That was because Hammerhead was thought to extend onto Tullow's adjacent updip Orinduik Block.
ECO Atlantic's updated competent person's report had pegged the gross prospective resources at Orinduik at between roughly 1.0-4.0bn barrels of oil equivalent.
Of that figure, only 11m boe were linked to the expected extension of Hammerhead onto Orinduik, Jefferies pointed out.
Tullow's Ugandan FID and production at its TEN field were also catalysts for 2019, they said.
Nonetheless, the analysts noted that Tullow's Guyanese operations were the "most important catalyst" for the group in 2019.
"Deleverage is material but TLW needs a new commercial growth asset. Guyana’s Orinduik block has been materially de-risked by the Hammerhead-1 well which can be proved by the Jethro exploration well expected to spud in June 2019."