Broker tips: Petrofac, Just Eat, Thomas Cook

JP Morgan upped its target for shares of Petrofac even after the consensus forecast for the company's earnings per share in 2019 had been revised up by 25% since the start of 2018, pointing to multiple factors that might drive further upside.

According to analysts James Thompson and Christyan F Malek, an improvement in market dynamics would follow from fiscal year 2018 order intake in Engineering and Construction at the upper end of expectations, a successful bond refinancing (expected in May), more non-core disposals and a favourable outcome to the Serious Fraud Office's inquiry.

Their raised target price, which was upped from 590p to 680p, also followed the outfit's first site visit in eight years, which the analysts said had butressed their confidence in the medium-term outlook for Petrofac.

It had also revealed that spending growth in the Middle East and North Africa was again on the up and yielded improved insights into the company's core abilities and competitive advantages, they said.

Indeed, the return of confidence in the core MENA markets underpinned prospects for the firm's order pipeline over the medium-term.

So while Kuwait was to remain a revenue focus, "growth ambitions" were also mirrored in Algeria, UAE and Saudi, the analysts said citing company presentations.

On the back of all of the above, and with 13% upside to its new target for the shares, the investment bank also reiterated its 'overweight' recommendation for the shares.

"It showed us that, while the share price may have been derailed by the SFO, the company hasn’t. We update our forecasts, narrowing our SOTP discount as the outlook improves and including the sale of JSD6000," it said.

Berenberg bumped its price target on Just Eat to 880p from 840p on Wednesday following better-than-expected first-quarter numbers, which saw revenue beat the bank's estimate by 9%.

Berenberg, which rates the stock at 'buy', said its estimates now sit above the top end of the revenue guidance range.

"Going into these results we were already of the view that the 2018 revenue guidance looked somewhat conservative and we sat towards the upper end. After the strong Q1 outperformance, however, we update our estimates and now forecast 2018 revenues of £731m, which is comfortably above the £660m-700m range."

Berenberg said strong momentum from SkipTheDishes and the developing markets are the key drivers of its upgrades.

"Both of these regions are currently taking on investment; Skip is loss-making and Spain and Italy are effectively being run at breakeven with outperformance being reinvested in growth. Therefore, we assume that growth in revenues has a more muted effect at the EBITDA level."

The bank said it still reckons the risk/reward from increased investments into own delivery is highly attractive and a good use of capital. "Early data shows that delivery has a positive halo effect on the marketplace business, can help acquire new customers and can negatively affect competitors’ growth," it said.

By leveraging its existing brand, corporate overheads and marketplace customers, Just Eat has as good a chance as any of reaching profitability in delivery, Berenberg said, seeing a solid return on its investment in the mid-term.

After Thomas Cook's share price was grounded for nine months, Credit Suisse says it now sees clear skies ahead for the travel group as it upgrades its recommendation on the shares to 'outperform' on Wednesday.

Thomas Cook's stock has seen very little movement despite finalising key partnership signings with the likes of Expedia and LMEY, competitor bankruptcies over at Monarch and Air Berlin, or even after the FTSE 250 rolled-out more impressive self-help targets, analysts at the Swiss broker told clients.

After running the numbers on the basis of the company's new operating model and recent recovery, Credit Suisse saw the potential for faster earnings per share growth and a share price re-rating.

The new operating model had delivered more than £130m of gross benefits between 2015 and 2017 (albeit partially offset by cost inflation and investment) and Cook's management saw "significant streamlining" that Credit Suisse expected to manifest itself in the form of further savings in terms of people and technology, alongside further revenue synergies.

Credit Suisse also highlighted Thomas Cook's robust margins of 13.3% on an EBITDAR basis, versus 14.5% for EasyJet, returns of 20% on mid-life value, and management's clear strategic efforts to enhance profitability such as by increasing seat-only and long-haul sales, exiting from its Belgian operations and the creation of a low cost Majorca base as further examples of its growth.

"TCG's new reporting structure has led us to re-think our approach to setting our target price. Previously we had used a simple multiple based approach with reference to UK focused airlines but not implement a more comprehensive sum-of-the-parts approach," they said.

In addition to the upgrade from 'neutral' to 'outperform', Credit Suisse upped its target price on Thomas Cook shares to 160p from 112p.