Broker tips: BHP Billiton, Pearson, Antofagasta

BHP Billiton may need to raise between $5bn and $10bn to keep hold of its solid A credit rating , Liberum analyst Richard Knights said.

“Slashing capital expenditure and even cutting its dividend to zero are not sufficient for BHP to realistically retain a 'solid A' credit rating, if spot commodity prices and currencies persist,” Knights argued.

“Given the company continues to be married to the idea of a ‘solid A’ rating throughout the cycle, a rights issue looks likely.”

He added that the threat of a capital call is likely to weigh on the shares, but its resolution, along with self-help measures of tighter capital spend and a dividend cut, would close the value gap to Rio Tinto.

“Further capex cuts and more capital would put BHP in a strong position versus its peer group from both a valuation and balance sheet perspective,” Knights said.

In December, Moody’s placed BHP Billiton’s credit rating under review for a potential downgrade, pointing to the steep decline and persistent weakness in commodity prices.

Meanwhile, last week, BHP Billiton said it expects to book a $7.2bn impairment charge on the value of its onshore US assets in its half-year results on the back of sliding oil prices.

In addition, it said it would cut the number of operated rigs in its onshore US business to five from seven in the March quarter.

“Oil and gas markets have been significantly weaker than the industry expected. We responded quickly by dramatically cutting our operating and capital costs, and reducing the number of operated rigs in the onshore US business from 26 a year ago to five by the end of the current quarter," the company said.

Earlier this week, the miner announced that it will cut iron ore production by 10m tonnes due to the dam disaster at Brazil's Samarco.

Liberum rates BHP at ‘sell’ with a 550p price target.

Investec recommended an ‘add’ rating for Pearson on Friday and lifted its target price to 791 from 748p, hailing the education publisher’s restructuring programme.

Pearson on Thursday said it would hold its division for 2015 as profits were likely to miss market expectations as it overhauls its business following the disposal of its media assets including the FT Group and a stake in The Economist Group.

It now expects adjusted operating profit of approximately £720m and earnings per share of between 69p and 70p for 2015. This is below forecasts and down from the group’s previous guidance of around the bottom end of 70p to 75p.

Pearson said it would carry out a £320m restructuring this year, which it expects to generate annualised savings of around £350m, with approximately £250m of savings in 2016 and a further £100m of savings in 2017.

“The new restructuring plan shows Pearson can still do self-help, though the orientation to efficiency and costs is less attractive than a new incremental growth programme independent of cyclical and regulatory pressures,” said Investec analyst Steve Liechti.

“While we did not expect a 17% ‘pop’ yesterday, from a trading perspective, Pearson now has a quiet seasonal quarter to deliver efficiencies and give a better view of prospects at full year before we go into the more important second half trading period. Shares could outperform over this period.”

Shares fell 2.85% to 750p at 1042 GMT.

Citigroup resumed coverage on Antofagasta after a restriction period, upgrading the stock to ‘buy’ from ‘sell’, having been a seller since 2012.

The bank noted the stock has lost around 75% of its value over the past three years and is relatively unique within the mining sector on account of its strong balance sheet, ability to self-fund at spot prices, and pure exposure to a structurally deficit commodity.

“We see ANTO as a ‘trough cycle survivor’ which should appeal to investors despite the risk of a further copper price decline,” it said.

Citi said its commodity analysts forecast a trough copper price in the second quarter of 2016, averaging $4,300/t, while the financial markets appear to be positioned for under $4,000/t.

“In that event, ANTO’s stock price is likely to follow the same direction along with copper exposed equities, but we feel comfortable in the company’s ability to weather any further downturn, supported by a very strong balance sheet. Therefore we are prepared to risk proving slightly early in our buy call.”

Citigroup cut its price target to 440p from 600p