Broker tips: Cairn Energy, Lancashire, Countrywide

Cairn Energy shares rose on Thursday as RBC Capital Markets raised its rating on the stock to ‘outperform’ from ‘sector perform’ and reiterated a target price of 260p.

“We view the recent share price weakness as an opportunity to take a position in Cairn ahead of the first half results, 16 August, RBC said.

“We anticipate management will increase the resource number for the SNE discovery (in Senegal) and, more importantly, provide revised (lower) cost guidance for development of the field (last provided based on 2014 costs)."

The broker highlighted news that Woodside Petroleum has agreed to pay $430m for ConocoPhillips’ 35% stake in a Senegal offshore oil joint venture, containing the SNE oil discovery. Cairn Energy holds a 40% working interest as operator in the joint venture.

“ In our view, although an unflattering read-through today, medium term, the deal provides another experienced offshore developer while removing the overhang/uncertainty associated with ConocoPhillips' well-known commitment to exit deepwater,” said RBC.

The analyst added: “The combination of a strong balance sheet, production base (from H2/17), and stated strategy to return value created by the drill bit to shareholders is increasingly making Cairn the 'go to' UK Main List exploration and production stock.”

Lancashire Holdings was left at a ‘hold’ rating by Canaccord Genuity on Thursday but its target price was lifted to 600p from 550p after better-than-feared first half profits.

The Bermuda-based insurance company on Wednesday reported profit before tax fell sharply to $56.6m in the six months ended 30 June, ahead of the $54m market consensus but down just over a third from the $88.6m last year. Pre-tax profit in the second quarter fell to $30.1m from $37.1m the same quarter a year ago, although it was 10% above market consensus.

The first half combined ratio rose to 76% from the 75% in the same period last year and bond yield reductions in the second quarter drove an investment return of 1.6%, up from 1.0% a year ago. The second quarter combined ratio rose to 80.6% from 78.2% the prior year.

“The 80.6% combined ratio compares very well with peers, but benefited from 35% points of reserve release, the biggest as a percentage of premium since Q1 2011,” said Canaccord analyst Ben Cohen.

Canaccord expects earnings per share to fall 4% in fiscal year 2016 but to pick up in 2017 with a 6% increase in EPS.

Cohen said the group’s shares stand to benefit from a weaker pound against the dollar.

“Sterling weakness has provided a boost to the share price over the quarter, but we think fundamentals are little changed, if not worse,” he said.

“In an even lower bond yield environment, and with peers Beazley and Hiscox talking down Special dividends, the importance of Lancashire’s yield has increased, in our view.”

Countrywide’s shares jumped on Thursday as Numis upgraded its rating to ‘add’ from ‘hold’ despite a profit warning from the real estate agent.

The company warned that 2016 earnings will be lower this year, as commercial and London residential transactions have stalled since Britain voted to leave the European Union on 24 June.

Countrywide posted a 25% decline in first half profits to £22m, reflecting “investment to underpin future growth” and a slowdown in the housing market in May and June before the EU referendum.

Revenue rose 9% to £370m, with growth across all businesses helped by gains in market share.

Numis said the company’s half year results show the impact of more challenging market conditions in the second quarter of this year after the increase in stamp duty charges on second homes and buy-to-let properties on 1 April.

“The company states that conditions have deteriorated more post referendum, particularly in London and the South East and this has prompted Numis to downgrade 2016 and 2017 estimates by circa 30%.”

Countrywide said it was unlikely to match the annual adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) level of £113m seen in 2015.

Accordingly, Numis reduced its full year EBITDA from £123m to £97m, which resulted in a 31% downgrade to reported pre-tax profit to £59.9m and adjusted earnings per share of 25.6p.

The broker also noted that Countrywide held net debt, including finance leases, of £258.3m, up from a previous £184.9m, reflecting £38.5m of acquisition spend, capital expenditure and working capital outflow. Numis expects net debt to fall to £200m by year end, based on retained profit and the group adopting a more cautious view on investments.

“Whilst today’s downgrade does not come as a surprise, it has led us to downgrade our target price from 416p to 286p, which is based on 10x 2017 PE – in line with our rating on LSL (Property Services), although we would highlight Countrywide’s higher level of indebtedness which does pose some risks if market conditions continue to weaken.”