Broker tips: Shell, TP Icap, Office stocks

Berenberg has retained its ‘hold’ rating on Royal Dutch Shell, but warned downgrades to earnings forecasts were likely.

Updating on trading on Wednesday, the oil and gas giant said conditions remained challenging and announced plans to cut between 7,000 and 9,000 jobs as it responded to a collapse in oil prices and sought to reposition itself as a green energy provider. Shell believes the overhaul will result in $2bn to $2.5bn in extra savings by 2022.

In a flash note published shortly afterwards, Berenberg said the restructuring would contribute to an announced underlying operating cost reduction of between $3bn and $4bn by the first quarter of 2021.

But it continued: “Overall, the outlook is for another challenging quarter.” The bank said the integrated gas business will be affected by weak lagged prices while upstream is likely to report a loss. The downstream business will have been hurt by weak utilisation, it added.

“In addition, trading and optimisation results appear to be lower than average across all divisions,” the bank said. “We would expect this announcement to drive lower earnings forecasts for the third quarter and the 2020 full year.”

Analysts at Cannacord Genuity downgraded their recommendation and target price for shares of broker dealer TP Icap after the firm disclosed that it was in "advanced discussions" to acquire non-listed Liquidnet Holdings.

According to the Canadian broker, the proposed purchase for $600-700m - including an upfront payment of $550m - valued the takeover target at 12 times' its trailing earnings before interest, taxes, depreciation and amortisation to June 2020.

Furthermore, given the absence of forecasts for Liquidnet, Canaccord plugged in its own assumptions and reached the conclusion that TP Icap's claim that the transaction would be neutral for earnings per share in year two was off.

For that to be true, they estimated that Liquidnet would need to nearly double its EBITDA.

Instead, Canaccord judged that the purchase would be 12% earnings dilutive, leading it to lower its earnings per share estimates for TP Icap for 2021 and 2022 to 33.9p and 34.4p, respectively.

Hence, analysts Justin Bates and Portia Patel downgraded their recommendation for the company's shares from 'buy' to 'hold' and slashed their target price from 401.0p to 275.0p.

Analysts at Morgan Stanley sounded a positive note on European office stocks, pointing out various price signals that appeared to point to the group now being overly discounted.

On the basis of their latest monthly survey of work-from-home practices across the Continent, they saw ample signs of sustained demand from employees for WFH.

Nonetheless, the latest survey also showed that 79% of employees and 75% of office workers had already returned to work.

That was up from the last survey, which yielded results of 74% and 70%, respectively, "and average days at home are still decreasing".

Significantly, the UK continued to lag behind, with only 45% of workers having returned thus far.

And yet, over the last four months, the gap between equity market prices and those for underlying assets had reached "extreme" levels with office stocks across Europe now close to trough [net asset value] discounts .

Furthermore, some asset sales had been priced close to - in some instances even above - valuation and some private equity outfits had taken an interest, as seen by KKR's decision to take a 5% stake in Great Portland during the previous week.

"Our office Overweights remain limited to the strongest economies (Alstria) and/or nimble companies with strong balance sheets (Great Portland, Derwent); although other office stocks could also benefit from a sustained value-driven rally, or leverage-neutral buybacks (ie funded by disposals)."