Broker tips: BP, LondonMetric, InterContinental Hotels

RBC Capital Markets downgraded its recommendation on shares of oil giant BP to 'outperform' from 'top pick' on Tuesday following a recent strong performance on an absolute basis and versus the sector.

The Canadian bank, which maintained its 625p price target, said it remains constructive on the company's medium-term growth profile and improving cash flow framework. However, given the recent strong performance, there is now less valuation upside.

"A combination of recent strong performance, more modest expectations on the downstream and a narrowing valuation discount versus peers leaves us with lower conviction on BP shares at these levels," it said.

RBC said the medium-term investment case remains compelling, "as upstream production volumes grow by 20% over 2018-22E, BP continues on its downstream growth strategy, and Macondo charges slowly reduce leaving BP with an improving financial framework".

"We see upside to shareholder returns provided BP can deliver on its asset sales programme over 2019-20, with debt reduction being the near term priority. We see these attractions as more recognised by the market, with BP outperforming all of its super-major peers in recent months."

Still at RBC, analysts initiated coverage on FTSE 250 real estate investment trust LondonMetric on Tuesday, calling the firm an "attractive opportunity" at a fair value.

RBC believes LondonMetric is levered to markets supported by long-term structural growth, thanks to management's plans to refocus its distribution portfolio towards London and the South East, with a greater weighting to urban warehouses, something the analysts forecast to have the "highest rental growth" over the next five years.

With LondonMetric increasing its exposure to UK distribution warehouses to over 70%, from under than 20% in 2013 and close to its 80% target, the Canadian broker reckons the group's portfolio transition was "well timed" having been largely executed ahead of significant pressures faced by retailers.

As a result of the positive trends, RBC expects to see LondonMetric's market rents for distribution warehouses increase about 5-6% per annum over the next five years, with urban warehouses at the high end of that range.

"The shift in retailing to servicing customers online has driven strong tenant demand and rent growth, which has also been supported by limited new supply. As a result, the average 4% pa like-for-like market rent growth we forecast for LondonMetric's overall portfolio is stronger than our broader coverage," said RBC.

RBC hit LondonMetric with a 'sector perform' rating and 205p target price right out the gate, noting that although it saw LondonMetric as an attractive opportunity, it still saw better opportunities elsewhere.

Shares in InterContinental Hotels got a boost on Tuesday as MainFirst initiated coverage of the stock at 'outperform' with a 5,600p price target, arguing that it's a safe haven with opportunities for growth acceleration.

MainFirst said that its non-consensus recommendation - 30% of ratings for IHG are 'buy' - relies on the strong fee-based, cash-generative, macro-resilient business model offered by the company.

"This, coupled with its best-in-class attributes, are key components vis-à-vis industry threats, ultimately offering a less risky play within our coverage," it said.

It noted that the shares are up 14% year-to-date but trading at an "attractive" 18x FY20E price-to-earnings, versus French rival Accor at 19.5%, while offering a 10% three-year earnings per share compound annual growth rate.

"IHG offers a pure asset-light model with a proven earnings and cash resilience through the cycle. Its best-in-class features, including its portfolio of strong brands, and a leading commercial/technological platform, bring competitive advantages and constitute solid attributes to face industry-specific threats.

"Strategic initiatives recently unveiled pave the way for a progressive acceleration in the development of the portfolio."

MainFirst said the next catalyst for the shares will be IHG's first-quarter trading update on 3 May, which it expects to show a steady quarter-on-quarter revenue per available room trend and positive net system size growth momentum.