Broker tips: Hargreaves Lansdown, TalkTalk, SSP, Tullow Oil

Credit Suisse analysts warned that while Hargreaves Lansdown offers the prospect of healthy growth over the next few years, the risk of disappointment was too great. As a result, they downgraded the company to 'underperform' from 'neutral' despite increasing their target price to 1,730p from 1,124p.

Trading at 29 times Credit Suisse's earnings estimate for 2019, Hargreaves' valuation is simply too high despite being a "great business", the analysts said.

After the shares rose 50% from early July the valuation assumes continued strong asset growth, steadily rising markets and relatively stable fee margins. At this point in the cycle the risk to one of these factors is high, Credit Suisse said.

In addition, Hargreaves faces three significant risks to its business. First, the Financial Conduct Authority's study of asset managers could be tougher than the market expects. Second, US tracker fund giant Vanguard's UK launch could put pressure on fee margins. And third, Hargreaves' new active savings product could attract higher capital requirements, limiting its ability to pay out cash to investors.

TalkTalk took a tumble as Exane BNP Paribas slashed its price target on the stock by 35% to 90p, saying the company’s commercial recovery looks set to stall this year, as it reduced its subscriber, revenue and EBITDA estimates and said it expects a dividend cut.

The bank said growth in the discount market has been a positive driver behind the group’s recent commercial improvement, but this is likely to be short-lived as other operators are making bigger inroads into their value niche.

Exane cut its mid-term TalkTalk retail subscriber estimates by around 4%, resulting in medium-term revenue cuts of 1-2%. In turn, this translates into EBITDA cuts of around 3% for FY19, 6% for FY20 and 11% for FY21. Its revised estimates broadly call for flat adjusted EBITDA of between £265m and £270m over the next four years. TalkTalk’s current guidance for FY18 is for EBITDA towards the lower end of guidance of £270m to £300m.

Given its “increasingly bearish” view of TalkTalk’s financials and recent questions raised over the balance sheet, the bank now expects a 50% reduction in the dividend. It still assumes the FY18 guidance for 7.5p per share will be paid, but now sees a 50% cut in this dividend to 3.75p for FY19 and beyond. It expects to hear about this at the FY18 results.

Goldman Sachs downgraded SSP, an operator of food and beverage outlets, to ‘sell’ from ‘neutral’ but lifted the price target to 575p from 535p.

The bank said SSP trades at a premium to leisure peers, concessions and contract caterers, and while the company’s historical execution has been strong, it does not expect growth rates to pick up to levels that would justify this premium valuation.

It said the current valuation implies an acceleration in earnings growth to over 30%, which it does not think is likely given an inflationary cost environment and headwinds to profit, as SSP starts refurbishments at Chicago airport.

The new target price of 575p implies 10% downside potential, hence the rating downgrade.

“Should the company outperform our expectations on cost efficiency (and hence profitability), we would need to revisit the outlook and our view. Additionally, and aside from company-specific factors, stronger travel trends or a faster pace of outsourcing would encourage us to take a more positive view on the broader sector, and SSP as a result.”

Canaccord Genuity revised its stance on Tullow Oil from 'buy' to 'hold', cutting its target price from 250p to 220p following reports the company may not hold quite as much recoverable oil at its Kenyan asset as previously believed.

Tullow has for some time estimated gross 'mean' discovered resources at its asset in the South Lokichar Basin, in which it holds a 50% stake, to be around 750m barrels of oil with an estimated basin potential of 1bn barrels.

However, Canaccord said recent reports from Kenya seem to suggest there may be a "downside risk to these figures", citing one article published on Tuesday in Standard Media that claimed there was potentially just 250m barrels of recoverable resources, a figure which would raise doubts over the project's commerciality.

Canaccord said: "Bearing in mind these comments, we revise our base case gross Kenyan recovery to 500mmbbls gross (from 750mmbbls), and given the likely extended timelines we delay our assumed first oil by 12 months to mid-2023."