Broker tips: Acacia Mining, Amec Foster Wheeler, Metro Bank

Acacia Mining got a boost on Tuesday as Peel Hunt upgraded its stance on the stock to 'hold' from 'reduce', noting that the group's two-year outlook has improved greatly and arguing that the recent concentrate ban is not as bad as it might seem.

Earlier this month, the Tanzanian Ministry of Energy and Minerals announced a ban of gold/copper concentrate exports, causing shares in Acacia to slump.

In 2016, copper/gold concentrate represented a little in excess of 30% of Acacia's revenue, making this a critical issue for the business. Acacia has stopped shipping its concentrate, which represents 55% of the gold production at Buzwagi and 45% at Bulyanhulu.

Peel said that although the ban is undeniably disruptive for the business and its financial position, it is likely to be resolved and for the short term working capital to have worked through by year-end.

The lasting impact is likely to feature higher future cash tax charges, which Peel has now baked into its forecasts.

"The selloff following the concentrate ban has carried shares nearer fair value and, following a full review of our mine plans, we increase our target price to 434p from 362p.

"This is driven by Buzwagi lining up for a far stronger 2017 than expected (higher grades) and North Mara positioning to deliver increasing tonnage from the high grade underground operation later in 2018. Therefore, we upgrade our recommendation."

Amec Foster Wheeler

Citi has downgraded Amec Foster Wheeler as it sees the oilfield services company having a more balanced risk/reward following the proposed takeover by rival Wood Group.

The bank downgraded Amec to ‘neutral/high risk’ from ‘buy’ and cut its price target to 580p per share from 600p, which is the implied offer price based on Wood Group’s share price of about 774p on Monday.

It also nudged up its 2017-18 estimates to reflect Amec’s 2016 results which were on in-line with expectations.

Amec’s 2017 outlook was similar to Citi’s forecast of another year of significant oil and gas and solar activity decline from the record levels in 2016, which is likely to be offset by stronger engineering and installation performance and a further material contribution from cost savings.

On Monday, Wood Group agreed to buy Amec for £2.2bn, which Citi sees as a “largely defensive deal” given the challenging environment for oil and gas, while it said that World Group would simplify Amec’s organisation, materially cut costs and position the business to benefit from a recovery in its key end-markets, but sees limited upside to its price target.

Wood Group has found cost synergies of at least £110m per year, aided by the overlap of operations in the North Sea which suggests that the chance of a rival offer is low.

Metro Bank

Broker Numis said the share price of Metro Bank was trading at a significant unjustified premium to the rest of the UK banking sector and so reiterated its 'sell' recommendation.

"We continue to be baffled by Metro’s valuation which in our view, could only be justified if it far exceeded management's already lofty 2020E targets," analyst Jonathan Goslin wrote.

He and his colleagues estimated Metro shares were trading for 3.7 times expected 2018 tangible net asset value and 48 times forecast earnings for that year.

Even based on management's 2020 return on equity target of 18%, this still implied 2.4 times 2020 TNAV and a p/e ratio of 14.

This contrasts with a UK banking sector as a whole that has been trading nearer 1.2 times 2018 TNAV and roughly 7.0 times forward earnings, with an average ROTE of 14%.

On the upside, Numis hiked its earnings estimates to reflect the 2016 results and its assumption of more benign near-term impairments, lifting adjusted EPS 24% to 28p for 2017, by 7% to 72p for 2018 and 5% to 132p for 2019.