Broker tips: Tullow Oil, Ultra Electronics
Berenberg bumped its rating on Tullow Oil up to 'buy' from 'hold' on Monday after the oil and gas exploration group said it had made a "substantial and high value" oil discovery in Guyana.
The bank, which lifted its price target on the stock to 240p from 230p, said the discovery at the Jethro field offshore Guyana and the subsequent de-risking of exploration potential in the Orinduik block address one of the key problems of Tullow Oil’s investment thesis - portfolio depth.
"Moreover, the de-risking of future exploration potential in the Orinduik block may allow Tullow to monetise part of its 60% stake in the block, which would subsequently address its balance sheet problems once and for all," it said.
"We estimate that selling half of its stake could raise circa $1bn, a substantial amount relative to its net debt of $2.9bn."
Berenberg pointed out that success in Guyana comes amid disappointment in East Africa, where progress on a farm-out agreement seems to have stalled.
Still at Berenberg, analysts lowered defence and security firm Ultra Electronics' shares from 'buy' to 'hold' on Monday but upped their target price from 1,750p to 2,200p, noting its shares had had a "phenomenal run of late".
With Ultra's shares rising 64% so far in 2019, Berenberg credited its strong performance to positive sentiment momentum and improving fundamentals, including prospects for higher organic growth, a strong order intake and a "group-wide business improvement strategy" under new chief executive Simon Pryce.
The German broker said Ultra's interim 2019 results had "certainly" lived up to its expectations, with 8.0% organic revenue growth, a decade-high order book of £1.0bn, and Pryce's improvement initiatives "tracking to plan".
However, Berenberg said Ultra's shares were now trading on a 2020 price-to-earnings ratio of 18x - or at a 20% premium to the pan-European defence sector's average and a 30% premium to the company's own 10-year average of 13x.
"While we feel this is justified given the improved outlook, we believe a fair amount of upside is now priced in, and expect the shares to pause for breath in the near term," said Berenberg.
"As such, we move to a 'hold' recommendation with a new price target of 2,200p (2% upside). We would use any pullback in the shares as a buying opportunity."