Broker tips: Lancashire, BT Group, BAE Systems

Credit Suisse upgraded non-life insurer Lancashire Holdings to 'buy' from 'underperform', saying that despite its fourth-quarter pre-tax losses missing consensus expectations, the share price offered a better level of risk/return.

Swiss bank dropped Lancashire's target price to 580p from 620p, citing potential risks to their target price coming in the form of large losses, reserving and investment risks, with Lancashire's outlook comments "less positive than expectations", which had driven the shares lower.

Analysts pointed out that rate increases following Lancashire's heavy losses in 2017 were expected to be in the "mid-single digit level", and as new business opportunities had been limited as the insurer's peers had defended their long-term relationships, but said, "nevertheless, given the share price de-rating and potentially positive read-across from a pick-up in M&A activity, we think that the shares now offer a more balanced risk/return."

As Lancashire has material exposure to catastrophe and tail risks, the firm's management, which had previously expected substantial price increases that could have led to improved shareholder returns to come on the back of the large losses witnessed in 2017, had scaled back their expectations for 2018, suggesting that initial indications had initially been too optimistic and that the environment became more competitive as January renewals approached.

"While these developments pose questions on Lancashire's longer-term strategy, we continue to think that the company still plays an important role in the current (re)insurance market albeit one less levered on catastrophe risks," the Friday morning note read.

"We trim our 2018E but raise our 2019E/20E estimates by 4%-5% on higher investment returns," it concluded.

Analysts at Berenberg upgraded telecommunications giant BT Group from 'hold' to 'buy' on Friday, saying that improving clarity on key strategic issues and improving market confidence triggered the re-rating.

Berenberg said its revised target price on BT, down from 320p to 310p, represented a 33% upside and even though it was "slightly below 2018/19 consensus", its analysts believe the valuation was "sufficiently attractive to turn positive now".

Carl Murdock-Smith and his team of analysts said that by the time the 2019-20 fiscal year rolled around, infrastructure investment, the end of public sector headwinds, remedial action to fix its Italian operations and scope for outperformance on EE synergies would coalesce to create growth in revenue, EBITDA and normalised FCF over at BT.

Berenberg also noted that in the long-term, BT was quite unlike most telecoms companies as it would actually be a beneficiary if real interest rates increase, given that its pension deficit would shrink.

"BT has faced tough financial drags in recent regulatory reviews. We believe the extent to which this is due to Ofcom’s cost attribution review is underappreciated," Berenberg's analysts noted, but this was before Ofcom released its Wholesale Local Access review on Friday morning.

Defence giant BAE Systems was under the cosh on Friday as JPMorgan Cazenove downgraded the stock to ‘underweight’ from ‘neutral’ and trimmed the price target to 550p from 555p following the company’s full-year results a day earlier.

The bank said BAE’s lacklustre guidance for 2018 earnings before interest, tax and amortisation and free cash flow suggests that, for the foreseeable future at least, it will continue to underperform its peers in US defence and in European civil aero.

JPM reckons the US portfolio can grow more than 5% a year for several years. However, UK sales look flat at best and defence export sales are unpredictable by nature. The bank argued that BAE needs a new export Eurofighter order to fill a hole in its delivery schedule from 2019-21.

"Our estimates only include deliveries where a firm order is won so there would be upside to our 2019- 21E earnings per share if a large Eurofighter order was secured. Based on channel checks we worry Saudi Arabia won't order EFs in the coming year, but this is just our opinion."

Shares in BAE fell on Thursday as it posted a jump in 2017 sales and earnings but said earnings for 2018 would be flat on the back of organisational changes and the adoption of a new accounting standard. Analysts had been expecting earnings to rise 2% in 2018.