Broker tips: Marks & Spencer, Ocado, Tullow Oil, Shell
Analysts think that Marks & Spencer’s £750m joint venture with Ocado faces a lengthy period of unprofitable development, but the expense should eventually pay off.
In a bearish note, Whitman Howard called the deal “the first stop in the likely long and unprofitable development of national online coverage for M&S’s food business”, and a “necessary but essentially defensive stop that will result in M&S’s cost of operations increasing permanently”.
Under the terms of the deal, leaked on Tuesday and announced on Wednesday, M&S has agreed to pay up to £750m for certain assets and rights in a 50:50 joint venture with the online delivery specialist. It means Ocado’s long-standing relationship with Waitrose will come to an end in 2020, with product after that being provided by Ocado and M&S.
M&S is funding the deal through a £600m rights issue and 40% dividend cut.
Whitman analysts pointed out a number of issues, including the decision for the joint venture to trade as Ocado.com, “which seems odd to us for a brand with the supposed strength of M&S’s food business”. It said Ocado will need more customer fulfilment centres and that the joint venture will need a proprietary branded business.
They added: “We can see that the joint venture will be unprofitable for some extended period as the initial years of operation are also likely to be burdened by immaturity and set up costs.”
Peel Hunt, however, adopted a more upbeat view. The brokerage, which has a ‘buy’ recommendation on M&S and a price target of 350p, noted that the JV would have had sales of £1.5bn and EBITDA of £34m last year and that management expects upwards of £70m of synergies to emerge.
Jefferies downgraded Tullow Oil to ‘hold’ from ‘buy’ on Wednesday, with the stock in sight of its new 245p price target, which was reduced from 250p, as it said "the story needs a new chapter".
"Ghana production remains the most positive element of current operations but with both Uganda & Kenya final investment decision timings still uncertain, Tullow needs a new material, commercial asset to drive the stock," Jefferies said.
It added that the highly anticipated Jethro exploration well, offshore Guyana, is the event to provide it but pre-drill risked value is close to being fully priced in.
Jefferies argued that trading at $26/boe per 2P reserves, Tullow remains at a premium valuation.
"Project sanction of Uganda would add 120mmboe of net 2P reserves we estimate, reducing the 2P metric to $18.4/boe and deleverage to our $2.46bn YE19e net debt would reduce the metric to $17/boe," it said.
Analysts at RBC Capital Markets downgraded oil giant Shell to 'sector perform' on Wednesday, citing three key reasons for the move.
RBC took a fresh look at the company's financial framework and concluded that a further $30bn in buybacks was needed post-2020 in order to reduce the firm's dividend burden, in turn "restricting its ability to high-grade its portfolio over time".
The Canadian bank, which also dropped its price target on Shell to 2,750p from 2,900p, felt that with ongoing uncertainty in the macro landscape and energy transition, Shell's dividend was "too much of a burden" over the medium-term, meaning its buyback was out of necessity, not choice.
"The current commitment to buyback ~$25bn over 2018-20 could reduce Shell's share count from 8,300m to ~7,500m by 2020, however, we think this is just the beginning," said RBC.
While it was not the sole driver of its downgrade, RBC also said Shell had screened poorly on its forward-looking reserve life analysis, something that "certainly does not help the investment case", even if it was less of a critical variable for Shell that for some of its peers.
However, RBC still saw the potential for capex to surprise to the upside through inorganic activity, with consensus factoring in spending at the low end of Shell’s guided $25-30bn range.
Lastly, the analysts pointed out that Shell's all-in breakeven was higher than for its sector rivals.