Broker tips: Lloyds, Ultra Electronics, Cairn Energy

The decision by UKFI to extend its trading plan to sell Lloyds shares until 31 December 2015, together with the government’s promise to sell approximately £4bn in stock via a discounted retail offer, should facilitate a full exit from the lender in 2016.

While positive, the shares are “up with events”, broker Investec said in a research note emailed to clients. Hence its decision to reiterate its ‘sell’ stance on the stock.

That comes after UKFI announced on Monday morning that it had lowered its stake in Lloyds to 18.99% from the 19.93% it held on 12 May.

The formerly above-consensus “underlying” view is now consensus as balance sheet shrinkage precluded any upgrade to its forecasts, Investec’s Ian Gordon went on to explain.

Gordon expects a further £1bn in PPI charges to weigh on the share price recovery. At the moment consensus is mistakenly not factoring in liability management charge associated with the redemption of its residual enhanced capital notes, the analyst said.

The broker reiterated its 84p target price.

Investec has advised buying shares in Ultra Electronics Holdings after the defence and aerospace group agreed to buy the electronics products division (EPD) of Kratos Defense and Security Solution.

The $265m deal with the US-based radio frequency and microwave systems supplier will increase Ultra Electronics’ presence in the US electronic warfare market, the FTSE 250 group said in a statement on Monday.

“We view EPD’s technologies as complementary to Ultra’s existing capabilities in the C2ISR and Sonar end markets,” Investec analysts Rami Myerson and Chris Dyett said. “EPD provides Ultra with additional opportunities to capitalise on growing demand for electronic warfare platforms and technologies in the Pacific and Eastern Europe. This should help drive a recovery in organic revenue growth and a re-rating. Buy.”

The transaction will increase the visibility of Ultra's order book given how EPD has strong positions on a number of long-term programmes.

Ultra expects to close the deal in the third quarter of 2015 and for EPD to be earnings accretive from the first full-year of trading. The company said it predicts it will generate $8m of cost synergies by 2019 as older programmes wind down.

“We estimate the deal will be 2% accretive in the fiscal year 2015 and 6% and 7% accretive in fiscal year 2016 and fiscal year 2017 respectively as Ultra begins to realise synergies,” the Investec analysts added.

RBC Capital Markets upgraded Cairn Energy to ‘outperform’ from ‘sector perform’ and lifted the price target to 250p from 220p following recent share price weakness.

“The combination of Cairn's Capital Markets Day and the prospectivity outlined in partner FAR's AGM highlight the potential for low risk appraisal drilling and longer term resource/reserves growth offshore Senegal,” said RBC.

It noted that exploration/appraisal drilling offshore Senegal has resulted in an initial oil discovery, which could add a further 70p per share.

The broker also pointed out that the company has begun to create strategic partnerships through various farm-ins and farm-outs of its acreage, including one with ConocoPhillips in Senegal, and said the continued process acts as a positive endorsement for Cairn’s prospects.

RBC added that although the tax dispute with Cairn India is ongoing, it doesn’t expect any material developments to take place until after the outcome of the drilling campaign.

In March, Cairn Energy was hit with a $1.6bn bill for unpaid taxes in India.

Shares in Cairn were up 1.8% at 172.60p at 1230 BST.