Broker tips: Nostrum Oil & Gas, Stagecoach, BAE Systems

RBC Capital Markets upgraded Nostrum Oil & Gas to 'outperform' from 'sector perform' saying recent weakness is an opportunity and its discount to peers it set to unwind as it delivers operational milestones.

The bank pointed out that Nostrum has underperformed the international exploration and production peer group by 20% and is now one of the most inexpensive stocks in its coverage, trading at a 14% discount to core net asset value.

However, RBC reckons this discount will unwind into year-end as the company completes its third gas processing facility, GTU3, doubling production capacity to more than 100,000 barrels of oil equivalent per day, and tests the appraisal well on the Rostoshinskoye field through the fourth quarter.

It said the stock's underperformance was likely to have been driven by uncertainty around the transfer of the former chairman's holding in Nostrum to BTA Bank and the associated overhand, but that this was overdone.

"Medium term we view Nostrum as a potential take out target given the focused portfolio, material reserves/production with some of the majors (already active in Kazakhstan) looking to rebuild portfolios following recent under investment."

Ahead of Stagecoach's 28 September trading update, HSBC bumped up its recommendation for the shares from 'reduce' to 'hold', telling clients they thought it was right to exercise caution in the long-term, although in the short-term it was unlikely that further trading weakness would come through.

Hence their decision, following recent weakness in the stock price and given modest downside risks.

Despite some investors' concerns, the investment bank believed it unlikely that "major" underlying downgrades would be forthcoming.

In the company's favour, provincial bus operations might be set to benefit from in the short-term from fare increases. As well, the North American unit ought to have seen a boost from a recovery in the price of oil.

An accounting charge might hurt consensus forecasts (worth 4% of EBIT last year), HSBC said, but added that it had been well-flagged at the company's fiscal year results in June.

Longer-term on the other hand, those same increases in provincial bus fares might turn out not to have been the wisest decision, given weak demand. Bus regulation was another risk factor always looming over the unit.

Compounding matters, in Rail it was "hard to know" if the provision which had been booked was sufficient.

Analysts at JP Morgan pared their 2018 earnings per share estimate for BAE Systems again, telling clients they believed they had underestimated the headwind from the end of Eurofighter deliveries to Saudi Arabia and to account for another leg up in Sterling.

In early July they lowered their 2018 EPS forecast by 5%, from 44.4p to 42.8p, to reflect an end to EF deliveries to Saudi and fewer ones for the Hawk trainer jet. Coupled to that, the pound had risen from 1.25 against the US dollar to 1.30 and now to 1.35.

Of the cumulative 9% downward revision to EPS, 5% was the result of lower military aircraft sales and another 4% from stronger Sterling.

On the upside, the defence engineering group was quite confident regarding prospects for Saudi buying a new batch of EFs and Qatar had signed a letter of intent to procure 24 of the aircraft.

Although no deposits for the new aircraft had yet been made, JP Morgan believed it justified to pencil in four EF shipments in 2019 and a further eight in 2020.