Broker tips: BHP Billiton, Rank Group, Just Eat

Analysts at Citi upgraded BHP Billiton to 'buy' from 'neutral' on Thursday in view of upside risks to what the mining and metals giant could realise in the divestment of its US shale assets.

Citi, which issued the dual-listed firm with a target price of £16 per share up 50p, said that BHP shares had seen a sell-off over concerns of a "sluggish pick-up in Chinese economic activity" since the Chinese New Year, as well as on threats of tariffs derailing the global economy, but noted that while they recognised the risk of escalation, its analysts did not see the increased protectionism as a "major impediment to global growth".

The analysts also highlighted the upside risk to what BHP could realise from shale divestments based on recent transactions, such as US Permian player Concho's recently announced proposal to acquire RSP Permian for an estimated value of $9.5bn.

"Applying a PDP blow-down value at NYMEX strip prices of $38k per flowing BOE to RSP’s current production would value RSP's roughly 92k net acres at around $80,000 per acre. Applying this multiple would lift our acreage valuation of BHP's shale assets from $10bn to $14bn," Citi's analysts concluded.

Shore Capital downgraded Rank Group to 'hold' from 'buy' on Thursday after the casino operator warned that full-year operating profit would come in between £76m and £78m, down from £83.5m the year before and below consensus expectations of around £83m.

The brokerage, which had been expecting FY operating profit of £80m, said the update for the 13 and 40 weeks to 1 April was "disappointing", with group like-for-like sales down 2% in the 13 weeks, making the 40-week figure flat against its full-year expectations of modest growth.

"We continue to see significant attractions in Rank’s asset base, the multi-channel opportunity and the potential to use its balance sheet for inorganic growth. However, with trading in its retail offering soft and limited visibility over inorganic expansion, especially given the recent resignation of CEO Henry Birch, we see little positive catalyst to the share price short-term."

On the plus side, though, it said the digital business continues to perform strongly, with revenue up 17% for both periods, sustaining the momentum seen in recent times.

"We expect the launch of the single wallet, due calendar H2, to be a further positive catalyst as it looks to exploit its near three million land-based members," Shore said.

Shore cut its 2018 pre-tax profit estimate by £5m to £75m. For 2019, it assumes a modest recovery, driven by further robust digital growth, to £77.5m from £83.8m.

JPMorgan Cazenove downgraded Just Eat to 'underweight' from 'overweight' on Thursday and slashed the price target to 656p from 976p.

The bank said it was turning more cautious on the company, which had been one of its top picks in the internet sector and the wider media space for the last three years.

"Rather than the well-discussed increase in investment levels due to delivery, we see a much bigger issue for the UK operations going forward. As a result of the delayed move into delivery, Just Eat's core customer base (in terms of restaurants) is still very much skewed towards the lower-price segment which increasingly brings strategic disadvantages."

The bank said the high/mid-price segments demands delivery and is already taken by first movers Deliveroo and Uber Eats, which are strongly gaining share outside London. In addition, it argued that in the low-price segment, chains are expanding rapidly into rural areas and cannibalising Just Eat's marketplace business.

JPM said it crawled all three major takeaway platforms in the UK - Just Eat, Deliveroo and Uber Eats - searching which takeaway restaurants are available on each platform in certain postcodes in all 32 boroughs of London and also the key boroughs of other larger cities like Birmingham, Leeds or Manchester. It found that while the number of restaurant offerings remained broadly flat for Just Eat across all postcodes, there was a strong increase in sign-ups for both Deliveroo and Uber Eats.

JPM said that while Just Eat still offers the most choice and restaurant overlap with Deliveroo and Uber Eats is only around 5% to 7%, it is left with the least attractive part of the market, which is likely to face market share losses going forward.