Broker tips: Dialog Semiconductor, Balfour Beatty, SSE, oil and gas companies

Shares in Apple supplier Dialog Semiconductor tanked on Tuesday after German private bank Bankhaus Lampe cut its rating on the stock to 'sell' from 'hold'.

It said there is strong evidence that Apple - from which Dialog derives more than 70% of its revenues - is developing its own power management integrated circuits and intends to replace the chip made by Dialog at least in part.

It said this could hit Dialog’s numbers from 2019 onwards, hence the downgrade.

"We have been observing much stronger interest in engineers of analogue and power management chips from Apple in its hiring activities for a little over a year. We believe that Apple is setting up power management design centres in Munich and California.

"We hear from the industry that about 80 engineers at Apple are already working on a PMIC with specific plans to employ it in the iPhone by as early as 2019."

Bankhaus noted there are currently 16 different job openings on the Apple website for analogue/power management engineers for the design centre in Munich alone. In addition, a search on social networks such as LinkedIn revealed that Apple has already poached about 20 chip designers, some of them with long-standing experience from Dialog.

The bank said that whether these plans will be successful or not remains uncertain but either way, Dialog is facing "significant uncertainty".

Last week, shares in London-listed chip designer Imagination Technologies tumbled after tech giant Apple said it would stop using its graphics technology for new products.

Balfour Beatty

Balfour Beatty got a boost as Bank of America Merrill Lynch upgraded the stock to 'buy' from 'neutral' and lifted the price target to 345p from 295p, citing improved confidence in US, UK and Hong Kong margin recovery.

In addition, the bank pointed to hidden value in the public-private partnership assets, balance sheet optimisation and potential favourable tax regime changes in the US.

"Balfour has undergone a significant transformation since the arrival of new management in early 2015. The group has stepped-up efficiency efforts, taken £124m out of its cost base, exited some activities (i.e., engineering services for external clients) and overhauled its order selection, monitoring of project execution and cash management.

"The US construction outlook has improved, and while Brexit casts a shadow on the UK, the pipeline of infrastructure projects could provide an offset," the bank said

It argued that PPP assets are still the core, with the company's internal valuation of the PPPs standing at £1.2bn at December 2016, but said they remain underappreciated.

Merrill also highlighted potential upside from US tax reform, saying that if the corporate tax rate were to drop to 20% from 35%, this would imply an £11mn net income benefit for Balfour Beatty in 2018E, or an 8% earnings per share uplift for the group.

SSE

Berenberg upgraded SSE to ‘buy’ from ‘neutral’ as it believes that the utility’s sector-topping 6.5% yield and promise of retail price index (RPI) linked dividend growth is sustainable.

The bank also said debt ratios are manageable and will reduce, political risk in the UK is “overplayed”, and that the risk to power prices in the wholesale market is skewed to the upside.

The broker increased its price target to 1,650p per share from 1,550p , an 11% potential upside and a 17% 12-month total return.

It said that the 6.5% yield and RPI-linked dividend policy is the highest dividend yield in the sector - the average being 5.1% - “from a company for which the dividend is sacrosanct”.

Berenberg expects the company's philosophy of putting the sustainability of its dividend at the forefront of its shareholder proposition for the foreseeable future and thinks that capital expenditure growth will give before the dividend if balance sheet pressure needs to be eased.

It forecasts a dividend cover remaining within SSE’s 1.2-1.4 times range over the next three years.

An expected net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of 4.3 times in 2017/18 is “a little high” for Berenberg, even for a company with about 60% regulated or quasi-regulated EBITDA, but it believes that this will be the peak.

A reduction in capital expenditure growth is expected to help reduce leverage to below four times in subsequent years, avoiding disruption to the dividend.

The broker maintained that political risk is“overplayed” as the “heavy-handed intervention in the supply market would be unnecessary and, frankly, a bad idea” and that political meddling, such as a price cap, would be bad for competition, customers and investment in the economy.

“Undermining the findings of the Competition and Markets Authority would have negative ramifications well beyond the bounds of the most recent probe into the energy supply market. Politics will always feature in this sector. Nonetheless, we continue to expect common sense will prevail when it comes to actual intervention.”

In addition, Berenberg said that the tight reserve margin and a hiatus in new capacity investment could remain a potentially inflationary feature of the UK power market for some time, especially if the government presses ahead with plans to phase out coal and start to close old nuclear power stations by 2025, while Brexit also puts currency pressure on price-setting thermal generation costs.

European oil and gas companies

Analysts at Barclays lowered their target prices for a swathe of European oil and gas explorers as they marked down their short and medium-term assumptions for the Brent price deck.

The broker lowered its assumptions for the price of Brent in 2017 and 2018 from $57 and $70 a barrel to $56 and $67 a barrel, respectively.

From 2019 onwards, Brent was now seen at $60 a barrel, down from $70 before.

"Although we continue to believe in a continued recovery in oil through 2017-18E, we now feel $60 is a more appropriate long-term assumption, better reflecting the planning assumption of management teams (and investors) assessing future investment opportunities," analyst James Hosie said.

The average result of those revisions was a 21% reduction in his estimates for the group's tangible net asset value.

Furthermore, the new price targets which flowed on from those revisions meant the average upside potential for stocks in the group was reduced from 21% to 9%.

Lundin Petroleum continued to be his 'top-pick', with Hosie touting the outfit's "high-quality" Norwegian production and development portfolio and strong financial position.

Its other 'overweight' recommendations were Africa Oil, Amerisur Resources, Cairn Energy and Ophir Energy.

Target prices were lowered for Cairn Energy (from 295p to 270p), Enquest (from 53p to 54p), Faroe Petroleum (from 115p to 110p), Ophir Energy (from 125p to 110p), Premier Oil (from 100p to 70p) and Soco (from 155p to 140p).

Although Genel Energy's price target was raised from 70p to 95p.