Broker tips: Pearson, Tullow Oil, G4S

Liberum slashed its price target on education publisher Pearson to 360p from 470p following the company’s profit warning in the previous session.

The brokerage said Pearson remains its key ‘sell’ in the media sector, as it has been for several years, with the profit warning on Wednesday demonstrating why. It pointed out that the company has finally admitted that its US higher education business is facing significant structural pressures.

Liberum, which expects Pearson to issue another profit warning in 2017, said its FY17 earnings per share estimate of 45.3p is below guidance of 48.5p to 55.5p as it reckons rental may have reached a tipping point where its effects accelerate and Pearson cannot adjust for them.

The brokerage said Pearson faces a “double whammy”, i.e. earnings downgrades and a de-rating as the market recognises that it has structural issues in its business.

“We do not see an end to the pain in Pearson's US higher education business as students switch to cheaper options (such as rentals).”

Tullow Oil tanked on Thursday after HSBC downgraded the stock to ‘hold’ from ‘buy’ but lifted the target price to 320p from 270p, saying the shares offer “limited upside”.

The oil exploration and production company’s shares have risen 19% since OPEC announced output cuts in late November and are up 147% in the last 12 months.

The group should begin to deleverage this year after five years of rising debt with production ramping up and capital expenditure falling sharply, HSBC said.

The farm-down of its Uganda Lake Albert assets to Total will lower capital expenditure while firming up the development timeline by putting control into a supermajor’s hands – a “good strategic decision”, according to HSBC.

However, the bank warned that oil prices - arguably the biggest driver of the stock - have limited near-term upside compared to its estimate of $60 per barrel for Brent crude in 2017.

“We don’t expect operational catalysts (e.g. exploration) to be material enough, and believe the shares now look fully priced after their recent outperformance.”

The bank said it was also disappointed by Tullow’s lowered production guidance on the TEN project in Ghana, due to pressure management issues and the inability to drill new wells until after a border dispute ruling later this year

On 11 January, Tullow said production at the TEN field in 2017 is now expected to be 23% lower than had been previously forecast.

Security services company G4S got a boost after Barclays upped its stance on the stock to ‘equalweight’ from ‘underweight’ and hiked the price target to 260p from 160p.

The bank said it reckons this year will see a combination of high organic growth, cost savings and balance sheet deleveraging.

Barclays’ more positive view on organic growth and margins as well as favourable currency moves and the removal of its assumption of a credit rating downgrade lead it to upgrade its earning per share forecast for 2017 to 18.1p from 15.8p.

The bank expects organic revenue to be 5% in 2017, which would be the fourth highest of the 30 business services companies it covers.

“The growth is supported by good contract wins and firm demand for security services. At the same time, after more than one false dawn, cost savings from multiple initiatives started by management in 2013 could now be set to come through.

“Improved cash conversion and further proceeds from the disposal of businesses are likely to reduce gearing, meaning management gets at least close to its 2.5x leverage target, removing debt as a drag on valuation and preserving the group’s investment grade credit rating.”