Broker tips: Provident Financial, Ascential, IQE, BP

Provident Financial is down at its lowest levels since the mid-1990s on the back of a weekend newspaper report that suggested the doorstep lender has been sounding out investors for a "bumper" capital raise.

The Sunday Telegraph had said management was looking for up to £500m to cover the cost of fines and to shore up its balance sheet. The article said that the announcement could be made alongside results that are due on Tuesday.

Broker Numis suggested the balance sheet does not need shoring up as Provident is "trading profitably and it is not paying dividends".

Provident, as well as recovering from its calamitous strategic rejig last year, is under investigation by the Financial Conduct Authority over its Moneybarn car loans business and the repayment option plan (ROP) sold by its Vanquis Bank arm. At the start of February, Malcolm Le May was made permanent chief executive, with the banking veteran having last year been appointed executive chairman on a temporary basis.

"While we believe it is possible that Provident could secure a contingent capital facility from shareholders, if there is a capital raise we believe a firm outcome from the FCA is required so that the quantum of any customer redress can be known," Numis said.

The resolution of ROP "should see investors start to look at the value of the group as opposed to obsessing about ROP", analyst James Hamilton said.

Hamilton believes Provident is worth about £3bn "on a look through basis" and consequently if ROP were to cost £0.5bn -- though he does not think it will cost anything like that -- "shareholders should double their money".

The shares were seen as a 'buy', "if there is 100% upside in a worst case scenario".

Analysts at Numis reiterated their 'buy' recommendation for shares of Ascential following its latest set of full-year numbers, which it described as "strong", highlighting the better-than-expected dividend payout.

The company's outlook was also "encouraging", Numis said, given management's expectations for better sales and profits.

In particular, they noted the company's confidence on the back of "the current level of forward booked revenue."

"The achievements of 2017 have positioned them well to increase their growth rate in revenue and profit in 2018 and the Board is confident in its prospects for continued success," Numis said.

Profits ahead at every level and debt as expected at 2.3 times' earnings before interest taxes and depreciation led to a payout of 5.6p per share (Numis: 5.3p).

All in all, following the latest results, Numis revised its estimate for Ascential's earning per share in 2018 from 19.3p to 19.5p and, after rolling forward their target, raised the latter from 405p to 455p.

Analysts at Canaccord reiterated their recommendation of 'buy' on shares of semiconductor developer IQE on Monday, dismissing claims that the company had misled investors.

Commenting on the recent accusations from short-sellers Muddy Waters and ShadowFall, Cannacord analysts said they "don’t subscribe to the view that the joint ventures (JVs) were created to 'deceive investors' and that IQE's accounts are entirely consistent with those of its JVs."

The Canadian broker added: "Recent weakness caused by the short sellers has created an attractive entry point which offers substantial upside to our unchanged target price of 190p."

In a research note sent to clients, the broker further argued that it believes IQEs margins for the second half of 2017 will be strong after a company trading update on 20 December said that revenues would not be less than £150m.

Canaccord analysts also stated that Muddy Waters and ShadowFall had failed to note IQE’s potential after focusing on its JV’s, stating that the company has seen "no change of accounting policy" and that its figures are "entirely consistent with the JV accounts."

Speaking of IQE’s realistic potential, the analysts argued that "it is unrealistic to expect a JV created just two years ago to have either filed any patents or generated a profit" and that there are "many other mass-market opportunities for compound semiconductors (CS), whose superior properties make them preferable to silicon for many applications."

"In short, we believe this note demonstrates that IQE did not create the JVs in order to inflate short-term revenues and cash flows, as the bear reports have suggested. More importantly, we believe that IQE is at the beginning of an exciting journey and has the potential to become a leading global player in the fast-evolving compound semiconductor industry."

Analysts at RBC Capital Markets took a look at oil and gas giant BP on Monday morning, saying they believed its cash flow framework would improve in 2018 as a result of a growing upstream base and favourable dynamics in the downstream, the latter of which it felt "may be underappreciated by the market".

RBC upgraded BP to 'outperform' from 'sector perform' and raised its target price to 570p from 550p, citing continued earnings momentum, both in the upstream and downstream, and more importantly improved cash conversion throughout the year as its principal reasoning.

"2017 was a transition year for BP, with a number of major projects in final execution stages and still a significant Macondo burden. We look to 2018 for continued earnings momentum both in the upstream and downstream, and more importantly, we expect cash conversion to improve this year," wrote analyst Biraj Borkhataria.

In terms of risks to its target price, RBC warned that BP's addition of fixed cash payments relating to the settlement on the April 2010 Deepwater Horizon oil spill would see the firm hit with a cash charge of $3.1bn in 2018, with a reduction to $2bn in 2019, with the investment bank also noting that it was expecting BP to "de-leverage more slowly than peers in a higher oil price environment".

"BP trades on a ~6.1% dividend yield, which we see as well covered on an organic basis between $50-55/bbl. We expect improving earnings and cash generation to show through in early 2018 as BP captures higher commodity prices and widening crude spreads. BP trades on 6.1x EV/DACF in 2019E versus the global sector average 6.8x and the European average at 5.9x," Borkhataria concluded.