Broker tips: Debenhams, Gym Group, Tullow Oil, Ophir Energy

Alexander Bueso WebFG News | 19 Sep, 2017 17:44 - Updated: 17:44 | | |




17:20 12/12/17
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17:20 12/12/17
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17:30 12/12/17

Investec reiterated its 'sell' recommendation on Debenham's on the back of expectations for foreign exchange headwinds, unanswered questions around execution and profitability and the ongoing shift towards 'on-line'.

Indeed, the dividend might not be "sustainable".

In a research report published following a visit to the outfit's new store in Stevenage, which they dubbed a 'work-in-progess' lab, analysts Kate Calvert and Alistair Davies said the company's fiscal year results on 26 October were unlikely to be a share price trigger.

On a more positive note, they admitted that profits before tax might come in ahead of company guidance of "towards the bottom of the market range if volatility continues".

However, they added that: "Many unanswered questions around execution and profitability mean it is difficult to forecast with any confidence."

As well, the company's hedging policy meant FX headwinds would be at their worst in the first half of 2018, they wrote.

Barclays Research upped its target on shares of Gym Group from 230p to 250p following its first acquisition since the group floated, purchasing 18 gyms from Lifestyle Fitness.

On the downside, the transaction was seen diluting the company's overall return-on-capital-employed, with 20% expected from the deal versus a target EBITDA ROCE of 30% on those sites which it added organically.

There were also potential integration risks which management might have to navigate.

Offsetting those were numerous potential positives, including adding a year's-worth of organic growth "instantly", significant earnings accretion on a per share basis, and attractive rents on the new sites which should bolster EBITDA.

Hence, Barclays retained its 'overweight' stance on the stock, adding that the EBITDA ROCE on offer was still attractive, while highlighting that by buying assets the company would reach cash payback more quickly than if it opted to build out organically.

Analysts at Credit Suisse rejigged their recommendations for European Exploration and Production outfits, telling clients the sector was better positioned to emerge from the cycle, while its year-to-date de-rating had made it more "attractive".

On the basis of the above, shares of Tullow Oil were lifted to 'outperform' (with a target price 210p, versus 205p previously) on valuation grounds and due to catalysts now lying closer on the horizon.

Cairn (CS's 'top-pick' with an unchanged target of 260p), Nostrum and Aker BP (target steady at 170p)were all kept at 'outperform'.
However, Nostrum's target was cut from 545p to 460p.

As a group, companies in the space were facing off against two challenges, worsening investor sentiment despite an improved oil price outlook and the need to position themselves operationally on the global cost curve relative to US shale rivals.

"International E&Ps are pricing in a long-term oil price of $57/bbl, on our estimates, vs. the forward curve at $54/bbl. Valuations have become more attractive compared to when we initiated on the sector," the Swiss broker observed.

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