Broker tips: Thomas Cook, Kainos, Burford Capital

Analysts at Berenberg upgraded cruise and travel operator Thomas Cook from 'sell' to 'hold' on Tuesday, saying it was "time to watch from the side".

Berenberg said its longstanding 'sell' case on Thomas Cook had been predicated on "an inappropriate capital structure" that would prove unsustainable as a tougher operating environment converged with a liquidity crunch.

However, the continued softening of Thomas Cook's operating environment led to matters coming to a head faster than Berenberg had predicted, with the London-listed outfit's shares now at 13p - just above the German broker's price target of 12p.

"While we think the company is far from being out of the woods, the optionality of a sale of the airline and the potential support of Fosun for the tour operator means that the risk is fairly balanced with failure," said Berenberg.

The analysts did note that the deterioration in Thomas Cook's financial position had left the company looking for a "white knight" to pay a fairly punchy multiple for its airline operations.

"Clearly there may be a bidder who can see some synergies, notably Lufthansa, and others may see some strategic rationale, but it seems unlikely that the multiple will be materially higher than we estimate."

On the other hand, unless Thomas Cook could properly address its financial position, then Berenberg also said that keeping the airline may still be prudent.

Analysts at Canaccord Genuity upped their target price on digital technology solutions firm Kainos from 590p to 660p on Tuesday, noting that the consensus forecasts for growth and margins both looked "conservative".

On the back of Kainos' most recent trading update, the Canadian broker highlighted how the company's results were slightly ahead of its own model, with management sounding confident about the firm's short and long-term growth outlook underpinned by strong sales orders and backlog.

The broker raised its already above-consensus estimates further, stating that it continued to see upside to markets' growth expectations of 8-9% for the company in 2020 and 2021 with scope for the group to exceed "conservative" estimates for a 50 basis point annual expansion in margins.

"The stock remains a rare combination of quality, growth and earnings upside benefiting from the strong multi-year themes of government and enterprise automation and workday adoption," said Canaccord.

Canaccord, which also reiterated its 'buy' rating on Kainos' shares, said it was further encouraged by the Belfast-based outfit's accelerating enterprise sales and international momentum across North America and Europe.

Over at Jefferies, analysts reiterated their 'buy' recommendation for shares of Burford Capital, pointing out to clients that the company's share of the legal recoveries from the Petersen investment might reach $2.5bn, which would equate to 55% of the company's market capitalisation.

In their opinion, the market was underestimating that value "although it is both an overhang and a potential positive catalyst for the shares."

The Petersen case involved two Spanish firms - together known as Petersen - which were pushed into bankruptcy by the Argentine government's decision to expropriate oil outfit YPF in 2012.

Those two companies sued the Argentine government in the States, alleging that the expropriation should have been carried out through a tender offer and at price set out in YPF's bylaws, and were now waiting for America's Supreme Court to decide whether or not it would hear an appeal on what the correct jurisdiction for the case was, the US or Argentina.

On the other hand, the asset was also a possible source of capital at a premium to its carrying value on the balance sheet.

Jefferies bumped up its target price for the shares from 2,253p to 2,364p, but only to account for changes in its foreign exchange rate assumptions.

The next step in the jurisdiction would likely take place in the summer or autumn, Jefferies said, with the broker also estimating that the case could be heard in 2020.