Broker tips: EnQuest, Debenhams, Smiths Group

Oil producer EnQuest’s shares rose on Friday as Canaccord Genuity said the company is “one of the most attractive plays in the sector”.

EnQuest on Thursday reported a drop in full year earnings before interest, tax, depreciation and amortisation (EBITDA) to $465m from $581m in 2014, beatings expectations of $408.

The decline came as it was forced to write down $626m on the value of some of its assets due to the recent slump in oil prices.

However, EnQuest said it expects to benefit on a change in UK legislation giving oilfield operators tax relief on decommissioning costs when they sell an asset will speed up such deals in the North Sea.

EnQuest also said it would cut costs this year to address the impact of lower oil prices on revenue. The company expects operating costs to fall to $25-27 per barrel this year, down from $29.7 per barrel in 2015.

“The organic direction of travel for the company is impressive and clearly it is doing a very good job of addressing all the issues within its grasp,” said Canaccord analyst Charlie Sharp.

“As a highly geared stock, it is also benefiting from the recent oil price strength. For those willing to ride this positive oil price direction, we believe Enquest is one of the most attractive plays in the sector.”

However, Sharp warned on the current scale and near-term direction of net debt and its impact on equity value.

Canaccord also urged caution on production delivery uncertainties regarding EnQuest’s North Sea Kraken development.

The broker maintained its ‘hold’ rating but raised its target price to 20p from 16p.

Investec downgraded Debenhams to ‘sell’ from ‘hold’ and trimmed the price target to 67p from 70p amid expectations of little profit over the medium term.

The brokerage said new chief executive does not change the fact there are structural challenges at the company.

“With cost pressures, a less flexible business model and online shift, it is difficult to see how sustainable growth can be injected into an undifferentiated business,” it said.

Investec said that while Debenhams has self-help opportunities – space optimisation, operating efficiencies and mark down – these are likely to be offset by material wage inflation and margin reinvestment back into differentiating the offer.

The brokerage said the stock’s valuation reflects a declining profit trend for 10 years and is not demanding, but a re-rating seems unlikely.

“We believe the next CEO needs to invest margin in re-establishing the ‘Designers’ brand credentials and differentiating own-bought.

“We are also concerned that growth is mainly coming from concessions (limited operational gearing) & beauty (low margin). This may not offset the in-store negative operational gearing from online shift.”

Smiths Group got a boost after RBC Capital Markets upgraded the stock to ‘outperform’ from ‘sector perform’ and lifted the price target to 1,225p from 1,050p saying it expects the recent outperformance to continue.

The Canadian bank forecasts 9% growth in earnings per share in full year 2017, driven by a resumption in organic sales growth and currency, with a weaker pound.

“We believe the share's current 14% PE discount versus UK peers will close over time and note the attractive 4% yield,” it said, adding that the yield should be covered by cash flow following the recent pension funding exercise.

RBC highlighted three key risks to its positive stance: a further downturn at John Crane, a stronger pound and a poorly-received acquisition.

“At 1,069p however we consider the risk/reward appealing,” it said.

The bank also said fears over the John Crane division were overdone.

RBC said its full year 2016 estimates look too cautious following the company’s results and the retained outlook statement. Its new forecasts are for FY16 and FY17 EPS of 77.5p and 84.5p respectively, up from 70.1p and 73.4p.