Broker tips: Tullow Oil, Prudential, Sophos
With Tullow Oil showing "clear signs of a return to meaningful exploration", analysts at Canaccord Genuity raised their rating on the group to 'buy' on Monday.
After a long period where balance sheet constraints had limited Tullow's capex capacity, the firm has been exploring again, with a high impact well underway in Namibia and its more recent Exxon discovery off the coast of Guyana, which the Canadian broker believes could have "far more significant positive implications" for the group.
Canaccord pointed out that larger projects in Guyana would be valued at roughly $9 a barrel, but noted that, given the shallower water depth of Tullow's Orinduik/Kanuku development, it would be reasonable to expect a lower cost structure for the project.
The broker noted that, for the most part, it tended to steer clear of including exploration in its target prices for larger exploration and production firms, however, in this instance, given the combination of Tullow's exploration track record, the proximity to discoveries, and the scale of the potential, Canaccord thought it reasonable to include Guyana into its target price.
Canaccord said, as a result, it had added a conservative estimate of the offshore Guyana value of 15p/share, equivalent to $280m or risked 28 mmbbls net potential.
This saw it raise the target price to 270p per share from 250p and raise the rating from 'hold'.
Analysts at Morgan Stanley trimmed their target price for shares of Prudential but reiterated their 'overweight' recommendation for the stock ahead of its de-merger into an asset manager to be called M&G Pru and an insurer focused on the UK, US and, above all, Asia.
In particular, they highlighted how its shares had "materially" underperformed their hypothetical 'sum-of-the-parts' valuation for the business as well as its domestic peers - despite the drop in Sterling.
However, in their opinion, the reasons for the stock's recent underperformance included the 'execution risk' around a potential de-merger, poor sentiment towards emerging markets and negative earnings for Pru.
Linked to the execution risk around the split of the two businesses, Morgan Stanley said, was the increased uncertainty around how the market will value the two successor entities.
On an IFRS basis, the broker's earnings estimates for fiscal years 2018, 2019 and 2020 were trimmed by 0.4%, 2.6% and 1.2%.
"Although our price target only changes modestly, it is now set at end FY19, rather than end FY18 so implicitly has reduced by ~8% (from 2,481p to 2,469p)," they said.
There were risks, of course, the broker said, including a potential worsening in credit conditions, continued challenges in emerging markets, and changes in competitive conditions and regulation in key markets.
Security software and hardware company Sophos was under the cosh on Monday as Deutsche Bank downgraded the stock to 'hold' from 'buy' and slashed the price target to 530p from 630p amid rising competition and as guidance looks challenging.
The bank said competition in Endpoint, which blocks malware and infections, appears to be worsening and there is increasing evidence of enterprise-level next-generation players attacking the mid-market.
"As such, pricing is anecdotally tough across both traditional and next-gen Endpoint," DB said adding that this was probably a significant factor behind the 5% constant currency drop in end-user billings in the first quarter.
DB said new product releases, namely EDR and Email are helpful, but not game-changing and unlikely to drive significant cross-sell as Intercept X did in FY18.
"Given limited potential for material product releases, pricing pressure and tough competition, we see limited scope for a major improvement in net renewal rates and therefore see the FY20/21 renewal book impact as less impactful than previously thought," the bank said.
It also argued that guidance for the second half and FY20 is "unrealistic" and said it expects this to be revised, likely at the third-quarter results next month.