Broker tips: Petrofac, Betfair, WPP

Petrofac was given a shot in the arm by Societe Generale on Thursday, as the bank upgraded its stance on the stock to ‘buy’ from ‘hold’.

“We are taking advantage of yesterday’s announcement of Schlumberger’s acquisition of Cameron to upgrade Petrofac,” it said.

“We see the Schlumberger-Cameron deal as the second game changer in one year, forcing other players like Saipem and Petrofac to react if they don’t want to miss out on the potential rebound of the offshore market in 2017-2018.”

It said this could lead Petrofac to either strengthen/consolidate its currently weak marketing alliance with McDermott or be taken over.

However, SocGen said its main reason for upgrading the stock is that it considers it to be more resilient than peers. It said the first-half results, which announced a sustained interim dividend and showcased well-managed net debt levels have strengthened its view.

It added that Petrofac has a lower pension deficit and less goodwill than peers, noting that academic research has shown that stocks with high goodwill levels have tended to underperform until management books what are deemed to be necessary impairment charges.

Exane BNP Paribas upgraded Betfair to ‘neutral’ from ‘underperform’ following the announcement on Wednesday that it has agreed in principle to the terms of a merger with Paddy Power.

Exane said the new discounted cash flow-based valuation for Paddy Power points to €95 a share. Based on that, and taking into account the 52%/48% proposed merger ratio, it calculates its new target price for Betfair at 3,000p, from 2,100p

The bank said that from a strategic standpoint, the deal is logical and would create a lean entity with strong cash generation, leaving room for sizeable dividend payments. In addition, it said geographical exposure is largely complementary, with Paddy in Australia and both companies in Italy.

Still, Exane said they will continue to operate separate brands and are already very cost-lean companies, meaning the potential for synergies seems low.

“The deal needs a great deal more analysis, but at first sight it looks like the market has already priced in the merger of the two companies,” it added.

Exane noted the deal should be finalised by end 2015 or beginning of 2016, and said it does not expect any headwinds from the Competition and Markets Authority.

Berenberg moved its rating for advertising giant WPP to ‘hold’ from ‘sell’ and raised its price target to 1360p from 1325p.

The bank said WPP’s first half results were operationally in line with its forecasts and while agency fee pressure continued, that was nothing new.

Foreign exchange was a drag, and was getting worse, Berenberg said, given substantial depreciation of key emerging markets currencies.

The bank said in the current environment agencies were increasingly in need of acquisitions.

“In our view, WPP in particular will need to increase spend on M&A in the future, given its relatively underweight digital positioning,” Berenberg said.

Berenberg said it preferred French ad conglomerate Publicis because expectations for it were lower and meaningful headwinds were easing.

However, on current levels WPP was no longer a sell, the bank said, and therefore upgraded it to ‘hold’. -