Broker tips: HSBC, Tullow Oil, Barratt Developments

Morgan Stanley upgraded HSBC to ‘equal weight’ from ‘underweight’ and raised its price target to 645p from 550p.

The broker upgraded the bank’s stock as the revenue outlook has improved on better Asia pacific (APAC) loan growth and higher rates.

“We have had an underweight rating on HSBC as we were concerned around risks to the dividend and what we saw as too optimistic revenue assumptions from consensus given the Asian growth outlook and US rate picture."

After strong capital build in the third quarter, increased optimism around HSBC's APAC loan growth and a sharp increase in US interest rate expectations we are now modelling earnings ahead of consensus for 2016 to 2019 estimates. While we still see better value elsewhere we no longer see material downside risk to the share price from here, said the note.

Tullow Oil shares fell on Tuesday as Goldman Sachs downgraded the stock to ‘sell’ from ‘neutral’ and cut the target price to 221.8p from 247.2p.

“Since the November 30 announcement of OPEC production cuts, the stock has rallied about 20%, in line with the front month of Brent, and we think it is now trading above the fundamentals of our long-term oil price assumption (US$60 per barrel),” Goldman said.

Goldman said it raises a note of caution on the reservoir performance of the Tweneboa, Enyenra, Ntomme (TEN) fields offshore Ghana. In a 9 November trading update, Tullow said production ramp-up at TEN was hurt by issues with water injection systems. The annualised gross production for TEN in 2016 is now expected to be 15,000 barrels of oil per day.

Goldman said while Tullow’s management have done an “impressive job of steering the company through a very difficult year”, the disappointment of the TEN project could offset the Jubilee’s recent outperformance.

Based on the increase in the estimated net debt, owing to TEN expenditure and lower-than-expected Jubilee revenues, Goldman lowered its target price. Tullow expects to exit the year with net debt at about $4.9bn.

However, if oil prices rise further, Goldman sees Tullow’s shares continuing to outperform. The bank also believes the balance sheet is unlikely to be a "major cause of concern" for the company.

Liberum downgraded Barratt Developments to ‘sell’ as it took a look at the UK housebuilding sector.

The brokerage said it sees long-term value in some housebuilders as the valuation looks appealing and long-term fundamentals remain favourable.

It noted government support for the sector in the form of a more helpful planning system and the help to buy scheme.

In addition, it said the land market is very benign, and housebuilders are much more disciplined since the 2008 crisis, running more prudent balance sheets.

However, it noted near-term risks to share price performance such as slowing growth impacting house prices, which could put pressure on estimates and the threat of reflation without wage growth.

Liberum cut Barratt Developments to ‘sell’ from 'hold’ as it sees relatively higher risks in its lower margins compared to peers, as well as it shorter landbank which could limit the sustainability of dividend payouts.

The brokerage’s preferred stocks are buy-rated Bellway, Berkeley, Gleeson and Persimmon.

It highlighted Bellway’s compelling valuation and said volume growth should be sustained, protecting profits if prices do fall a little as expected.

Liberum maintained its ‘buy’ on Berkeley in spite of the general caution around London, as the company has secured significant forward sales to protect prices and volumes and has successfully added value to sites.

As far as Gleeson is concerned, it said the unique business model gives it industry leading margins and excellent growth prospects with limited competition.

Liberum said it likes Persimmon for its high dividend at low risk. In addition, it expressed confidence that the company will achieve the payments pledged because of management's incentive scheme.

The brokerage kept Bovis, Redrow and Taylor Wimpey at ‘hold’.

While Bovis looks cheap, Liberum has resisted the temptation to turn more bullish on the shares as its margin profile makes earnings most geared to downside risk.

As far Redrow is concerned, it said “risk aversion among investors may now limit appetite for investing in a housebuilder with a degree (even though comfortable) of debt”.

Liberum said it may be exercising too much caution leaving Taylor Wimpey at hold, especially given the high level of dividend expected.