Broker tips: TransGlobe Energy, Rolls-Royce

Analysts at Canaccord Genuity more than doubled their target price on oil exploration and production firm TransGlobe Energy from 80.0p to 165.0p on Monday, stating the group's agreement with the Egyptian General Petroleum Company to merge, extend, and modernise its onshore Eastern Desert licences was "a huge step forward".

Canaccord said the combination of West Gharib, West Bakr and North West Gharib under a single new licence with an extended development period and enhanced terms "completely reshapes" and "dramatically improves" TransGlobe's outlook.

"The path is now clear to realise the full potential of the assets for the benefit of both TransGlobe and EGPC," said the analysts.

"In our view, this agreement is the single most important in the company's history and it provides the foundation for rising cashflow, which in turn should enable further M&A activity and a restart of shareholder returns."

The Canadian broker noted that TransGlobe had "extensive operational experience" in Egypt, and had also shown the potential for production growth through investment before.

Analysts at Berenberg cut their target price on aerospace and defence company Rolls-Royce from 250.0p to 140.op on Monday, citing ongoing headwinds stemming from the Covid-19 pandemic.

Berenberg stated that no one even vaguely observing pandemic news and global air traffic trends in recent months should be surprised that Rolls-Royce tempered its cash guidance and near-term outlook in its trading update on Friday.

However, Berenberg did note that Rolls Royce's medium- and longer-term trajectory remained "positive", in its view, with progress on restructuring continuing as planned and the company reiterating its free cash flow expectations for breakeven in the second half of 2021 and roughly £750.0m in 2022.

"Despite a flatter recovery in the near term and our conservative assumptions, we still see a path to significantly higher cash flow and an entirely delevered balance sheet within three years," said the analysts.

The German bank, which stood by its 'buy' rating on the stock, also noted that its forecasts implied a FCF yield of 10% and 2023 and 13% in 2024.