Broker tips: BP, Rotork, Mediclinic, housebuilders

Deutsche Bank has upgraded its stance on oil giant BP to 'buy' from 'hold' with an unchanged price target of 505p.

The bank said it was upgrading the stock that after a challenging six months which saw the shares lag the European peer group by 7%.

"In doing so we position for anticipated newsflow on project starts (Egypt, Oman, UK, T&T) and external indications that Macondo cash outflows are now moderating.

"Following two disappointing quarters for operating cash flow which have served to undermine confidence in the group's ability to rebalance its cash cycle at current Brent prices we believe the risk/reward balance in the equity is notably improved and that impending volume adds will aid conviction that BP's dividend is not only sustainable but will be augmented by late 2018 buy-backs."

When DB downgraded the stock to 'hold' back in October 2016, it had argued that following the largely sterling-induced run in the nominal share price the valuation placed upon the shares was no longer competitive on a sector basis.

In addition, with the cash outflows on Macondo rising sharply following BP's decision to accelerate the pay down of claims for business and economic losses, DB expected to see a period of added cash flow uncertainty and with it potential investor concern about the group's ability to rebalance its cash cycle at a ‘realistic oil price’, at least in the near term..

Six months later and the bank said these risks have in essence come to pass with the company’s relative share price performance undermined in the process.

Rotork

Rotork rallied as JP Morgan Cazenove upgraded the stock to 'overweight' from 'neutral' and lifted the price target to 265p from 230p, saying the company was positioned to return to growth.

The bank said it reckons the group's earnings power has increased and earnings can significantly exceed previous peaks.

"Our analysis increases our confidence that end-market headwinds are easing, the group remains well positioned to benefit from the recovery and growth opportunities exist outside of just oil & gas capex."

JPM said that incorporating its analysis into its model drives double-digit upgrades and its forecasts are now above consensus.

The bank upped its estimate for 2017 adjusted earnings per share to 11p from 10.1p and for 2018 EPS to 12.8p from 10.8p. It increased its forecasts for full-year revenue in 2017 to £637m from £609m and for 2018 to £670m from £620m.

JPM said it builds only a modest recovery in end-market demand over 20172017 into its forecasts, but this represents a reversal on the downturn pressures.

Mediclinic International

Macquarie downgraded South African private hospital group Mediclinic International to 'neutral' from 'outperform' and reduced the price target to 770p from 860p.

The bank said it expects the business environment in the UAE health space to remain tough and that a recovery to the previous margin levels is highly unlikely in the near term.

"Furthermore, we also expect Mediclinic’s SA business to be under pressure on the back of the tougher trading environment while the Swiss business will continue to chug along with potential regulatory risks in the near to medium term."

Macquarie expects it will take some time for the company's Abu Dhabi operation to start turning around, having been hit by a meaningful loss of doctors since the reverse merger took place.

In addition, the bank said it is concerned about the potential oversupply of beds in the medium term in the region, which may lead to pricing pressure.

It also said that pre-opening costs for Parkview hospital, which is due to begin trading in the fourth quarter of 2018, will be negative for margins during that period.

At 1020 BST, the shares were down 2.4% to 693.50p, also weighed down by the weaker rand, which slumped overnight after Standard & Poor's cut South Africa's sovereign credit rating to 'junk'.

Housebuilders

Analysts at Liberum have raised their forecasts for housebuilders, preferring growers rather than returners, but they remain cautious about the housing sector due to share price gains.

The broker raised its earnings per share forecasts by about 10% for 2017 and 15% for 2018 as house price inflation expectations increase to 3% in 2017 and slow materially to 1% the following year, while economic forecasts improve.

But it is cautious on the housing sector, despite higher target prices due to recent share price gains.

It prefers growers who can offset expected margin pressure from house price inflation with volume growth to returners, such as Bellway, MJ Gleeson and Redrow.

Liberum upgraded Redrow to ‘buy’ from hold’ and raised its target price to 561p from 415p, while Bellway and MJ Gleeson were maintained at ‘buy’ with target prices of 700p and 3,032p, up from 662p and 2,780p, respectively.

However, Persimmon and Berkeley were downgraded to ‘hold’ from ‘buy’, although their target prices were raised to 2,161p and 3,169p, from 1,900p and 3,150p respectively, on valuation.

Barratt Developments remains Liberum’s least preferred stock with its rating maintained at ‘sell’ with a target price of 492p, up from 425p, as its short landbank makes its dividend less sustainable under stress than for the other returners.

The outlook of the British economy has shifted and Liberum claimed that economists are now more optimistic about 2017 and expect only a mild slowdown in 2018/19 with the rate of unemployment now anticipated to rise to only 5.3% in 2018.

Liberum also said that the macroeconomic environment remains uncertain, housing affordability “looks stretched”, and looks that way to the regulator too. It expects the government's Help to Buy scheme to face tests in 2018, but said it is likely to come through unscathed.

It also forecasts that any interest rate hikes would likely impact sentiment rather than the housing market, the build cost inflation is likely to persist and that the land market may become more competitive.