Broker tips: BT, Burford Capital, BP, Ferrexpo, Just Eat
Morgan Stanley has highlighted a range of strategies BT’s newly installed chief executive could unveil next week, including spinning out Openreach, but has warned there is a real chance that there will be no significant changes to the strategy announced at the full-year results.
Morgan Stanley said there was a 15% chance that Jansen could adopt a bullish stance at the results and announce a range of wide-reaching measures aimed at shaking up BT's long-term strategy. Possibilities include significantly reducing headcount, selling non-core, lower-margin assets, or separating out the fixed line network business Openreach.
“We think network separation would be most well received,” the analysts noted. “New opex targets and/or disposal of non-core assets could also be met favourably, albeit to a smaller degree.”
They argued BT's shares could improve by as much as 12% in this situation, noting: “BT's shares have been among the worst performers in telecoms, with the total return down 3% in the year-to-date and 39% in three years, suggesting that a different strategy from here could be preferable.”
Morgan Stanley said a more bullish approach could include announcing plans to cut the dividend or increase capex from £3.7bn currently to around £4.5bn, to funder higher fibre investments, which would weigh on the shares.
“We would expect to see selling pressure from dividend investors, but do not anticipate the shares to fall by as much as the near-term free cash flow downgrade,” the bank said. “Higher near-term capex could drive longer-term profitability and, ultimately, a more favourable relationship with the regulator Ofcom.”
However, Morgan Stanley, which has an 'equal-weight' rating on BT and a price target of 250p, said the most likely outcome was that there would be “no major deviations in strategy” at the results, which would be met with "modest disappointment". The focus instead would be on free cash flow and dividend; it is forecasting FCF for the 2020 of £2.1bn, down from £2.4bn in 2019, “reflecting headwinds in Consumer and Openreach”. It sees the dividend held flat year-on-year at 15.4p.
Analysts at Canaccord Genuity slashed their target price on shares of stockmarket darling Burford Capital, flagging 20 areas of risk/concern to clients which they believed might be going unappreciated.
The target price was cut from 1,543p to 1,196p and the recommendation was kept at 'sell'.
Among other things, the Canadian broker saw a risk that the provider of arbitration and litigation finance might be forced to either pursue a new fundraising or cut back on lending should realisations fail to materialise at the level it was forecasting.
They also challenged the company's claim to an 85% return on invested capital on concluded & partially realised investments, saying that their own analysis revealed a ROIC of 51% on those that had been concluded and of 36% for those that were partially realised.
Hence, they cut their earnings per share estimates for the firm's financial years 2019 and 2020 by approximately 18% each one but for 2019 they were still anticipating adjusted profits before tax would more than double, excluding fair-value movements.
They were also careful to explain that "For the avoidance of doubt, we see real opportunity for investors in the growth of the litigation funding market."
"Equally, we also believe BUR has built an impressive, market-leading position and is generating attractive returns."
Analysts at Jefferies reiterated their 'buy' recommendation and 600p target price for oil giant BP's shares on Wednesday, pointing to the potential for the company to lower its gearing and highlighting the success of its downstream activities.
The company's balance sheet was still "stretched and under pressure", with gearing above 30%, but as divestiture proceeds came in that could be reduced to the mid-20% level, Jefferies said.
The analysts also called attention to BP's big beat in Downstream, thanks to a "strong contribution" from trading, which drove results that came in 14% ahead of consensus and 21% above their own estimates.
Among the potential catalysts for share price gains, Jefferies cited share buybacks to fully offset the dilution from its script dividends in the third quarter of 2017, which management had pencilled-in for completion by year end 2019.
Also cited as potential drivers of the share price were asset divestitures to fund its liabilities from the Macondo oil spill and the acquisition of BHP's acreage in the Permian.
Liberum has upped its stance on shares of Ferrexpo to 'buy' from 'hold' as it said the recent selloff was overdone.
The broker noted that Ferrexpo shares had dropped 31% in the past two weeks on concerns about potential management involvement in the possible misappropriation of funds from Ukrainian charity Blooming Land, to which Ferrexpo has donated $110m over six years.
Liberum said it was unlikely management knew of or suspected any potential misallocation of funds before ceasing payments to the charity in May 2018.
"Assuming this becomes clearer following completion of the independent review, we expect the shares will rebound, despite our view of further softness in Chinese steel demand and a pullback in benchmark iron ore prices."
Liberum pointed to a number of reasons why it's unlikely that management was complicit. It said the only doubt that has been cast around Ferrexpo's chief executive, Zhevago's independence from Blooming Land is from auditor Deloitte, which has not alleged any link but rather has not been able to absolve the possibility that there is a link.
"This is obviously very different from any specific allegation," the broker said.
In addition, it pointed out that the sudden resignation of Deloitte last week, which prompted a huge slump in the share price, is in part due to a technicality. "The resignation was because the company had to publish its results for 2018 before the conclusion of the independent review into the case. The auditors placed some blame for this on the board of the company, which did not immediately vote in favour of an investigation into the matter," it said.
The broker lifted its price target on the stock to 250p from 185p to reflect the current strength in iron ore prices and spot free cash flow yield of 26%.
Just Eat was under pressure on Wednesday after JPMorgan Cazenove downgraded its recommendation on shares of the online takeaway platform to 'underweight' from 'overweight' as it named Germany's Delivery Hero its top pick in the sector.
JPM said it was turning bearish on Just Eat as it sees ongoing weakness in the UK and market share losses.
"With more than 100% of EBITDA, the UK remains the key share price driver - and the UK business is slowing quickly with +7% order growth in Q1 (after +13% in Q418)," it noted.
"High exposure to less attractive restaurants, cannibalization from delivery restaurants (finally) signed up on the JE platform and poor tech execution versus peers appears to have taken its toll."
JPM said it expects order growth for the UK to remain subdued going forward and materially reduced its UK valuation from £2.3bn to £1.7bn, causing its sum-of-the-parts target price to drop to 682p from 822p.
More broadly, the bank said the outlook for online takeaway platforms remains bright "but investors can't afford to play just a single theme, as share price performances are likely to diverge further from here".