Broker tips: Network International, Southern Energy, Prudential, Melrose Industries

Jefferies downgraded payments firm Network International to 'hold' from 'buy' on Monday and lifted its price target to 400.0p from 360.0p as it said that a second non-binding bid by private equity makes a take private more likely.

Network International announced on Friday that it had received a "highly preliminary" 400.0p per share cash offer from Canada's Brookfield Asset Management. This followed an earlier bid from a consortium of CVC Capital Partners and Francisco Partners at about 3870.p a share.

Jefferies said it believes the chances of both bidders walking away seem low at this point.

"Our new price target is in line with the latest non-binding offer by PE firm Brookfield, following a non-binding offer by the consortium this week," it said. "The current share price suggests the market sees a good chance that the latest offer, or something modestly above that, will now be successful."

Analysts at Canaccord Genuity lowered their target price on exploration and production firm Southern Energy from 90.0p to 85.0p on Monday but said the group looked "set for growth" as US gas prices improve.

Canaccord Genuity noted that while drilling was taking place at Southern Energy's recently concluded seven-well programme on its Gwinville field in Mississippi, Henry Hub prices tumbled from $7 to just over $2 per thousand cubic feet.

"Southern receives a meaningful premium given its location, but the current pricing environment is unattractive so four of the seven wells have not been completed," said the analysts, who reiterated their 'speculative buy' rating on the stock.

"The present gas prices have set back the organic growth programme, resulting in a slowed expansion timetable, but the outlook, in our view, remains bright. The DUCs look to have the best drilling results so far and the shortest drilling times. We believe that sets the company up well for a return to production growth as gas prices improve and development drilling restarts with improved drilling efficiencies and better reservoir understanding."

Analysts at Deutsche Bank raised their target price on insurance firm Prudential from 1,460.0p to 1,550.0p on Monday, stating the stock's current price did not reflect a number of key points.

Deutsche Bank believes the stock's price fails to incorporate Hong Kong's re-emergence, a "safe approach" to its investment mix, or the new chief executive's intention for the company.

"Despite the re-opening of the border between Hong Kong and China and broad equity market growth since the beginning of the year, Prudential's share price has only risen 2% year-to-date," said DB, which reiterated its 'buy' rating on the stock.

"As such, we believe the shares are deeply oversold, at a circa 55% discount to AIA on an IFRS 4 PE basis. Putting this into context, our new 1,550.0p target price provides 35% of upside, which would take the discount to AIA to a more normal 20% level."

Citi resumed coverage of Melrose Industries with a 'buy' rating on Monday and also set a target price of 480.0p for the blue-chip.

Melrose, which acquired GKN in 2018 in an £8.0bn hostile takeover, last week spun out GKN’s automotive business as Dowlais Group, leaving it exclusively focused on aerospace.

Citi said it did not expect any further diversification away from aerospace, adding: "We expect margin improvement to be driven by the ongoing recovery in the aero cycle, benefits from the near-complete restructuring programmes and, most importantly, the reaping of benefits from past investments in risk and revenue sharing partnerships within the engines business."

It added that an upcoming capital markets day on 17 May "should shine a light on this opportunity" as well as delivering new financials disclosure between engines and structures.