Broker tips: Ophir, Capita, Croda

Ophir Energy’s shares gushed higher after Canaccord Genuity upgraded the stock to ‘buy’ from ‘hold’ and lifted the target price to 105p from 80p.

Canaccord cited Ophir’s newly formed joint operating company (JOC) with OneLNG to develop the Fotuna gasfield offshore Equatorial Guinea via a floating liquefied natural gas (FLNG) facility.

Ophir will own 33.8% of the JOC which is expected to commercialise the 2.6trn cubic feet project.

Canaccord said the Fortuna framework “provides the basis for a project which would be a step change for the company” in terms of booked reserves and production.

“As a result, in the absence of clarity on development/value of the offshore Tanzania gas, Fortuna is set to become Ophir's most important asset once the key milestones above are completed,” the broker said.

“However, while the project now has substance and the unrisked valuation is substantial, we anticipate the market will only gradually derisk Fortuna as these milestones are checked off. “

Canaccord raised its target price in line with other similar profile exploration and production companies based on net present value of 12.5, compared to NPV15 previously, given the Kerenden field is now producing and Fortuna is more firmly established.

Having already more than halved since its September profit warning, Capita shares fell to their lowest in a decade after analysts at HSBC and RBC Capital Markets warned the shares had the potential to crumble yet further.

RBC cut its target price to 500p from 600p as a lack of growth, margin pressure and a stretched balance sheet was seen as the company's best-case scenario, with a worst case of further downgrades, change of management and an equity raise.

HSBC downgraded the stock to 'reduce' from 'hold' and slashed its price target to 450p from 1,020p, responding to many investors who had been asking if the shares have hit a trough by saying "we see a material risk that they have not".

Capita has high financial gearing, declining sales and a weak growth outlook, "a combination that seldom fuels investor confidence", while consensus estimates of a 1-2% decline in organic sales decline and 40 basis points expansion of operating profit margin for 2017 also now "seem optimistic", HSBC said, adding that its earnings per share estimates are 8-9% below the consensus, with dividend forecast 50% below consensus.

HSBC saw three strategic choices for Capita: a slow de-gearing that would hold back M&A and dividends, disposal of underperforming business, and/or a capital increase.

"A slow, organic de-gearing does not look like a realistic option to us. The UK public sector pipeline is weak, private sector contract awards and decision making have come to screeching halt post the Brexit vote, according to the company," analyst Rajesh Kumar said.

"The transactional businesses such as the recruitment business, the share registry, and the IT box shifting sales are unlikely to cyclically swing back to growth soon. If the decline in organic sales worsens further, financial de-gearing may not happen. A highly geared balance sheet in a weak demand environment may impede further long duration contract wins."

RBC's Andrew Brooke also noted that the UK outsourcing market is likely to remain under pressure as decision making has lengthened, discretionary spending is on hold and rebids are likely to result in margin pressure and/or greater risk transfer relative to first-generation outsourcing contracts.

Brooke said there were also "a number of Serco-esque red flags"; including a lack of growth, falling ROIC, increased exceptionals, significant acquisition spend, regular divisional reorganisations, increased amounts of accrued income and contingent liabilities, and no key external management appointments for a long time.

"Hence we believe there remains a risk of further write-downs, one-offs and a rebasing of expectations at some point."

Deutsche Bank has downgraded its rating on Croda International to ‘hold’ from ‘buy’ and cut its target price to 3,600p from 3,300p, citing subdued growth in 2016.

The bank said Croda has lagged behind all its consumer chemicals peers this year.

“We expect organic top line growth to remain relatively soft in 2017 (+2.9%), notably in the ’higher value’ Consumer Care division and have cut our 2016-18E earnings per share by 1-3% due to lower sales and margin assumptions (target price lowered to 3300p),” Deutsche Bank said.

“Whilst we welcome Croda's focus on innovation and margins, the ongoing lack of organic top line growth remains a concern to us and at 20x 17E price-earnings ratio (broadly in-line with faster growing, less cyclical consumer chemicals peers) we see the valuation as fair and downgrade our recommendation to ‘hold’.”

The company, which manufactures engine lubricants, plastics, and chemicals for the health and beauty industry amid its large specialty chemicals portfolio, on 3 November affirmed its expectations for the full year as it reported its third quarter trading update.

Croda said demand remains subdued in a number of its end markets but profitability remains “strong” due to a improved product mi and innovation.