Broker tips: Croda International, MJ Gleeson, Bowleven

Credit Suisse downgraded Croda International to 'underperform' from 'neutral' but left the price target at 3,300p.

The bank said Croda shares are trading at a premium to fair value given operational headwinds in 2017 and structural longer-term pressure in Personal Care as the business lifecycle matures.

CS forecasts near-term earnings headwinds from upfront investment costs for the Atlas Point ethylene oxide facility, further price pressure in Omega-3 and continued portfolio downsizing.

Atlas Point is Croda's new ethylene oxide facility being built in the US, which will use corn-ethanol to produce ethylene oxide, giving organic credentials to its formulations.

CS noted the facility will incur circa £3m of ramp-up costs in the second half of this year as production is brought online.

Credit Suisse expects 2% volume, 1% price and 50 basis points margin pressure in 2017.

"We believe Croda's competitive position in Personal Care is under pressure from new entrants at both the value end (specialty chemicals) and in the company's premium portfolio," it said.

CS said it forecasts flat volumes to 2020 as Croda trims its tail-end business, where greater competition is eroding the margin premium.

MJ Gleeson

Berenberg initiated coverage of MJ Gleeson at 'buy' with a 740p price target, calling it a "standout" UK housebuilder.

The bank said Gleeson has a cost leadership and market position that allows it to sustain profits at the high end of the sector and gives a clear path for continued growth.

"Its housebuilding business could easily double or triple in size over the next decade, in our view. Meanwhile, we think there is hidden value in its Strategic Land division, which, with recent transactions in the sector, could soon be realised. This forms the basis of our initiation."

Berenberg expects a sustained volume growth of around 10% a year at a time when other sector growth rates are generally slowing. It reckons the main constraint on this growth is management’s ability to recruit and train suitable site managers. As a result, it thinks there will be an upgrade to management growth targets at the company’s capital markets day on 5 July.

The bank pointed out that Gleeson is the only listed builder of "low-cost" homes, with an average build cost per house 60% below the sector average of £200,000.

"That results in gross margins in its Homes division at the top end of the sector at circa 33% despite selling at an average £126,000 compared to the sector on £310,000."

In addition, the bank said investors are undervaluing Gleeson’s Strategic Land division, with around 60p per share of value not recognised.

Bowleven

Analysts at Barclays have reinstated a rating on Bowleven at ‘underweight’ and a price target of 34p after the termination of the oil and gas company’s brief strategic review, while it said there also needs to be a monetisation plan for its Cameroon project.

A recent shareholder vote to remove chief executive Kevin Hart and four other directors and the subsequent resignation of the chairman means that the majority of the four-person board are now nominees of the company’s largest shareholder, Crown Ocean Capital, a Monaco-based investor.

Crown Ocean has previously pressed to remove members of the board, including Hart and chairman Billy Allan, as they want to transform Bowleven from an oil and gas explorer into a holding group and return excess cash to shareholders.

Barclays said that the new management team is pursuing a strategy to minimise cash burn while maximising the realised value of the company’s existing assets as well as return any excess cash to shareholders.

However, the bank said that if delivering this strategy was straightforward, there would be a long list of small cap exploration and production companies that have efficiently monetised success and returned the cash to investors, but the reality is that “a clean exit at a full price is rare while scarce equity capital will continue to favour larger, diversified and self-funding businesses”.

It believes that Bowleven’s Etinde project in Cameroon has considerable upside potential but realising significant value from the asset has been, and will remain challenging for the company as a minority partner with a 20% non-operated stake.

Etinde’s operator NewAge and Russian partner Lukoil have higher capital allocation priorities, and the asset appears to lack a commercial solution acceptable to all partners and the Cameroon government, while the $40m payable to Bowleven in 2020, if two appraisal wells are not drilled, will provide 7p per share floor to the bank’s valuation of the asset.

The appeal of returning a large portion of the company’s $95m cash balance is understandable, but Barclays thinks that it can only enhance the outlook for shareholders if it comes with a plan for the monetisation of Etinde.

“Although Bowleven has very limited future commitments, quantifying the capital needed today to monetize Etinde remains challenging regardless of whether it intends to participate in the development or not. A buyback or equivalent process returning significantly more than the $10m proposed last year could weaken Bowleven’s negotiating position for divesting Etinde”, Barclays said.