Broker tips: Petra Diamonds, BAE Systems, Avast
Analysts at Berenberg revised their target price for miner Petra Diamonds slightly higher on Tuesday following a first half of trading which they described as a "mixed bag".
With net debt of $596m, broadly flat but slightly above Berenberg's estimates of $577m, the German bank expects Petra to deleverage in the second half.
While Berenberg acknowledged that a pit wall failure occurred at Petra's Williamson project in January, with 1.3mt of material falling into the pit, would likely lead to an increased capex throughout 2020 - as mining had now moved to the north-west area of the pit and guidance remaining unchanged following a strong start to the year, the analysts said that with cash relating to Williamson mostly staying in Tanzania, they do not expect "a major impact" to the group's cash management.
The analysts also pointed out that Petra saw increased market stability towards the end of the December quarter, and highlighted that management noted that demand "continued to improve" post-period end as the midstream replenished inventory.
Berenberg reiterated its 'hold' rating on Petra and nudged its price target on the group up to 10.0p from 9.0p in anticipation of higher prices in the third quarter of the miner's 2020 financial year and an improved long-term cost profile.
Offsetting those factors were the likely increased capital spending at Williamson and the broker's forecasts for a slower improvement in mix at Petra's Finsch.
Barclays has upped its rating on BAE Systems, following two core acquisitions struck earlier in January.
In a note published on Tuesday, analyst Charlotte Keyworth said the deals “suggest opportunism, favourable timing and, importantly, that the new management team are allocating capital to address the main drivers of the long-standing valuation discount to US primes”.
BAE is acquiring Collins Aerospace’s market-leading military GPS business for $1.93bn, its biggest acquisition for a decade. At the time, BAE said the deal should generate revenues of $359m in 2020, with potential for growth of 10% a year. It is also spending $275m buying the tactical radio unit from fellow defence contractor Raytheon.
As a result, Keyworth argued, BAE was “increasing US Department of Defense revenue exposure in attractive growth markets.”
She continued: “We see this potentially warranting higher multiples on the $11.5bn revenue US portfolio, and it further bolsters our confidence in upside potential to our existing MSD year-on-year organic revenues growth forecasts.”
It also meant that the engineer would be less prone to 'cash swings' linked to down payments on big export orders.
Peel Hunt initiated coverage of Avast on Tuesday at ‘sell’ with a 405p price target, arguing that despite the company’s strengths, the shares are "overvalued" at the current price.
The broker noted that Avast is a versatile cybersecurity company whose software is on about 35% of PCs worldwide, outside of China.
"Its scale has given it a solid moat and exceptional margins. It also has steady and growing revenue streams," it said.
However, it said that in the long run, Avast is facing existential threats. It pointed to Microsoft’s native cybersecurity, which is now proving to be a serious challenger and said there may not be room for Avast in a world moving towards cloud-based services.
Peel Hunt’s base case scenario is that Avast for the most part fends off threats from cloud computing and Windows Defender.
"Avast is able to do this because it continues to provide a broader offering of security and ancillary services," it said.
"Additionally, current users remain with Avast because they have built up trust with the brand. Avast is also generally able to integrate into the new cloud environment."