Broker tips: Tullow Oil, Sainsbury's, Tesco, Standard Chartered
Analysts at RBC Capital Markets downgraded Tullow Oil on concerns about the oil and gas explorer's bid to shrink its debt burden through a rights issue.
RBC believes that the rights issue should insure Tullow’s survival, but that it draws out any share price recovery and so it ‘downgraded its stock to ‘sector perform’ from ‘outperform’ and cut its target price to 275p from 400p.
On 17 March, Tullow announced that it planned to raise £607m through a rights issue of 467m shares, where existing shareholders will be able to buy 25 new shares for every 39 shares they own at 130p each, a 45% discount on the closing price on 16 March.
RBC said that although Brent crude’s slide back to $50 per barrel was testing investors’ confidence, it believed that Tullow was turning a corner, and the resumption of ‘normal’ service at its sites would help accelerate its financial recovery while an oil price recovery in the second half of the 2017 financial year and sectorwide success with the drill-bit could have stimulated investor interest.
The rights issue appeared to be “premature” following on from following on from July's $300m convertible loan and January's $900m disposal of the Uganda business.
“Although Tullow is dealing with unprecedented levels of debt, few shareholders would have expected the company to announce a $750m fundraising on the heels of a $900m disposal”.
By doing this, Tullow has highlighted a problem with the ‘create value/harvest value' strategy, when sellers are looking to limit capital gains tax and buyers are avoiding large upfront payments.
RBC expects the share issue will dilute the impact of future newsflow, as Tullow’s exploration team will need to work harder, to move 1.5bn shares, which could have negative implications for Tullow’s 2018 exploration-led growth strategy.
As Tullow continues to de-risk its projects with its 'material stakes in material projects' its is becoming a more credible takeover target,according to RBC, with major oil companies more than able to address Tullow's debt issue without selling key assets.
Tesco and Sainsbury's
Tesco got a boost on Thursday as Deutsche Bank upgraded the stock to ‘buy’ from ‘hold’ and lifted the price target to 240p from 230p.
The bank said that while it remains concerned about volume growth, Tesco’s shares have underperformed around 5% over the past month and the risk/reward skew is now sufficiently attractive for a buy rating.
Deutsche said its buy case rests largely on a belief that the UK business can improve profitability from its current levels, even on stable volumes.
“We have outlined the reasoning behind this a number of times but it reflects benchmarking versus historic profitability and versus peer profitability and takes into account group scale, store level sales and differences in store ownership.”
DB reckons Tesco can deliver a small beat at its full year results on 12 April.
“Within this, we think the UK margin progress will be better than expected, lending credibility to the margin recovery story. We also expect a miss from the international business but we believe investors will value progress on UK profitability more highly.”
In the same note, Deutsche cut its stance on Sainsbury's to ‘hold’ from ‘buy’ and lifted the price target to 300p from 280p, given a strong performance over the last quarter and reduced upside to the bank’s target price.
DB noted that its upgrade to buy had been premised on having a more favourable view of the Argos deal than the market and believing that the share was attractively valued relative to peers and was essentially pricing in a material margin reset, which we it not think would happen.
It said the fourth quarter trading update was a slight miss on the grocery like-for=like side, but the Argos LFL was a strong beat.
“We continue to believe the Argos acquisition was both financially and strategically attractive. Of all the structural challenges facing UK food retailers, we think property costs are the greatest. Footfall is a valuable and increasingly scarce commodity. We think the Argos business helps Sainsbury’s protect and enhance the footfall to its stores.”
Standard Chartered
London analysts at Berenberg bank downgraded Standard Chartered to a ‘hold’ rating based on the ongoing restructuring programme at the bank, as well as concerns about the need to restart its capital return.
StanChart’s target price was also cut from 750p to 725p, reflecting the costs of restructuring.
Berenberg pointed out that the bank has achieved a huge amount in a short space of time, but it did not see adequate room for growth throughout the next 12 months.
To trade closer to tangible book value the bank is "likely to need significant capital return to start and revenue growth to pick up, without a consequent pick-up in credit losses,” the note said.
“However, this seems at least 12 months away, with little capital return to reward investors in the meantime.”
Dividends and share buy-backs are the most likely way for Standard to go back to capital return, according to the German bank.
Increasing issues concerning the liquidity of the US dollar could also affect its share price in the next twelve months.
“While a tightening of USD liquidity should be beneficial for STAN due to its USD clearing activities, our concern is that were the USD to strengthen significantly as a result of USD shortages, STAN could fall as investors grew scared of the potential impact.”