Broker tips: BG Group, Halma, Enterprise Inns

Nomura reiterated its ‘buy’ rating and target price of 1150p on BG Group after the company reported a rise in full-year earnings.

Pre-tax profits came to $2.97bn (£2bn) in 2015, compared with a loss of $2.3bn the previous year, despite the impact of falling oil prices. In the final quarter, BG's losses improved to $1.17bn compared to $8.3bn in the fourth quarter of 2014.

“The liquefied natural gas business showed resilience meeting expectations for the full-year ($1,456m in earnings before interest, tax, depreciation and amortisation), despite tough macroeconomic conditions,” Nomura said.

“The breadth of BG’s customer base underpins what we think is a resilient model, with BG supplying two new countries in the fourth quarter (Jordan and Egypt).”

The release marked BG’s final results before the takeover by Royal Dutch Shell is complete. BG said shareholders would not receive a further dividend for 2015 but they will receive Shell's 2015 fourth-quarter dividend. Shell on Thursday reported a 44% decrease in fourth quarter profit to $1.8bn, in line with estimates.

“Our numbers suggest Shell has paid a premium for BG as we estimate an net asset value of 630p per share and 800p per share for BG assuming flat $50 per barrel and $60 per barrel, respectively (Nomura estimates 10% weighted average cost of capital vs Shell at 7-8%), albeit the reality was that during the course of the past 10 years, analysts’ estimates (including our own) of BG’s valuation have been as high as £20 per share,” Nomura said.

“BG offers a unique combination of: a) a high-quality differentiated set of assets with a portfolio that has been largely restructured; and b) an attractive free cash flow profile on the cusp of a significant positive inflection point. For Shell, we think buying BG is the right strategy for the long term.”

Halma’s shares climbed on Friday as Investec said its acquisition of CenTrak will add to revenue and profit growth in 2016.

The healthcare devices maker is paying $140m (£96.3m) for CenTrak, a Pennsylvania-based maker of sensors, from private shareholders.

“CenTrak bears the hallmarks of a Halma acquisition: the application of IP in a market with strong regulatory drivers, excellent growth and high margins, with scope for expansion internationally and into other niches.

“This takes the sum spent by Halma on acquisitions in full year 2016 to around £190m and net debt to around 1.1x earnings before interest, tax, depreciation and amortisation (EBITDA). We estimate that acquisitions will add almost 4% to revenue and operating profit growth in full year 2016 and around 6% in full year 2017.“

Investec reiterated its ‘hold’ rating and cut its target price to 833p from 840p. The broker adjusted its full-year 2017 and 2018 earnings per share estimate up 2.5% but the “devaluation of UK Electronic & Electrical Equipment peers brings our target price down fractionally”.

Barclays downgraded Enterprise Inns to ‘underweight’ from ‘equalweight’ and slashed the price target to 80p from 155p.

It pointed to the selloff in credit markets, which it reckons could continue to impact sentiment towards highly leveraged equities such as Enterprise, which has the highest debt/EBITDA in the sector at 7.6x.

Barclays also highlighted the £350m bond due for refinancing in 2018

“We are concerned that if credit markets deteriorate then the interest cost on refinancing debt could increase, damaging P&L earnings and cash flow,” the bank said.

In addition, it pointed to risk to earnings from the forthcoming Market Rent Only legislation.

Barclays said while it admires the “bold” strategic review introduced by the company in 2015, there is execution risk on completing such an ambitious project whilst running a highly-leveraged balance sheet.

“Although Punch faces very similar issues, we believe that Enterprise’s greater leverage (and higher EV/EBITDA) creates additional risk to equity holders from a valuation perspective."