Broker tips: BP, BG Group, Experian, European banks

The risk/reward trade-off in ‘big oil’ has improved despite the unsustainably low price of oil, analysts at Liberum said on Friday.

Indeed, unless M&A opportunities appear or the intensity of investments falls fast, then the best thing these companies can do is to return the bulk of profits to shareholders.

So while funding their dividend policies through organic growth in free-cash-flow is “challenging”, string balance sheets, asset sales and scrip dividends will continue to plug the gap until oil prices recover.

The cancellation of the scrip dividend will be worth watching as a possible signal that the path to sustainable cash flow is clear.

On the basis of the above, the broker upped its recommendation on BG Group and BP to ‘buy’ from ‘hold’. The target prices for each were improved to 1,165p and 405p, respectively.

In the case of BG Group the broker added it was convinced the Shell bid would go through, offering low-risk upside potential of 17%.

Shares of Experian were offering an “attractive” valuation after falling afoul of investors’ concerns surrounding Brazil, analysts at Deutsche Bank said.

Since May the stock has de-rated from about 20 times’ 12-month forward earnings to 17 at present, Deutsche Bank analysts explained to clients in a research report.

In parallel, 12 month earnings per share of Experian in US dollar terms had risen by 20% while the European markets’ earnings per share on the same basis was down by 25%.

“This relative earnings strength in one of the most innovative companies we cover is not represented in relative valuations similar to those seen during the global financial crisis”, the analysts said.

The broker maintained its ‘buy’ recommendation on the firm’s shares.

On a similar note, HSBC on Tuesday lifted its target for Experian higher to 1,290p from 1,150p, emphasising the growth momentum in its US business, on-going disposals and limited downside risks from Brazil and its Consumer division.

European Banks face a daunting regulatory environment that will leave the sector with an average capital shortfall of 60 basis points at the end of 2018, broker Exane BNP Paribas estimated, meaning their dividend payouts were still at risk.

Nonetheless, that was expected to be the situation after approximately 230 basis points of cumulative cash dividends being paid out over that time horizon. Hence, "there is capacity to absorb this impact through lower distributions," the analysts said in a research note sent to clients.

Also on the negative side of the ledger, the full range for the impact - estimated at 190 basis points - on banks was between 150 and 290 basis points.

As well, a surplus in one bank wouldn’t help another in deficit, so individual banks might be impacted by significantly more.

"In aggregate we estimate a capital shortfall at end-2018 of €77bn for the banks that are short (60% of our coverage universe), and they have €167bn capacity to address this through lower cash dividends over 15-18E," Exane explained.

Barclays, Commerzbank, Deutsche Bank, Santander and Danske Bank were the lenders that stood to bear the largest impact, as the capital shortfall versus target represented more than 50% of the broker's estimated cash dividend expectations out to 2018.