Broker tips: Hunting, Royal Mail, AA

Analysts at Morgan Stanley downgraded their recommendation on shares of Hunting and cut their target price, telling clients consensus was too upbeat about the prospects for activity in the oilfield services space and hence the company's top-line growth.

They also believed the stock's relative valuation had become too rich.

Supply dynamics in the oil market had deteriorated and optimism around the US rig count had toned down as a result.

So while consensus was anticipating 25% growth in the outfit's 2018 revenues, Morgan Stanley was expecting something more on the order of between 12% to 13% - with the rig count almost flat at then current levels.

Hunting had already de-rated during the recent sell-off since mid-April, with its stock down by roughly 9%.

Yet changing hands at a 2018 EV/EBITDA multiple of 11.0, the valuation was "too demanding, leaving little room for error".

Investec cut its target price on shares of Royal Mail, telling clients it was "very positive" on the long-term potential for efficiencies but less so on the outlook for the company's operating margins.

The broker hailed the improvement seen in the company's parcel volumes during the first quarter - thanks to new cross border initiatives - and better-than-expected letter revenues, saying it had been too pessimistic on the latter.

However, the analysts lowered their 2018 forecast for the firm's earnings before interest and taxes by 5%, explaining that they now expect that the significant efficiencies which they had envisaged would occur more slowly.

On a more positive note, they bumped up their sales forecasts slightly and believed it likely that an offer to staff regarding their pensions plans would at least be put to a ballot.

Valuation was also supportive, the broker said.

Shares in roadside assistance group AA surged on Wednesday as Barclays initiated coverage of the stock at 'overweight' with a 280p price target.

Barclays said that three years into its investment programme, the full-year 2017 results were the first sign that it is starting to bear fruit.

The bank said there have been a number of changes at the company: the renewals and sales process is modernised and more flexible; brand marketing has re-started; the new underwriting business can utilise propriety vehicle data and is performing ahead of management expectations and a new CRM should kick-start cross-selling efforts.

It pointed out that the drop in personal roadside membership and motor insurance policies - which disappointed post IPO - has been halted and argued that the new underwriting arm could reverse fortunes in the insurance business.

"This potential inflection point coincides with the shares trading at near all-time lows. As investment/capex spend normalises, we expect free cash flow generation to increase dramatically in FY19e (CY18e).

"This would place the shares on a CY18e free cash flow yield of circa 11%. We argue that this is not reflective of the core roadside businesses, which is defensive, has good visibility and can generate substantial cash flow."