Broker tips: Shell, William Hill, WH Smith

Royal Dutch Shell shares gained on Wednesday after RBC Capital Markets lifted its target price on the stock to 2,000p from 1,9000 and reiterated an ‘outperform’ rating.

The oil producer on Tuesday announced plans for more asset sales and cost-cutting over the next few years amid lower oil prices.

Shell will exit oil and gas operations in up to 10 countries and sell 10% of its production as part of a $30bn asset sale plan by 2018. The group lowered its planned 2016 capital expenditure (capex) to $29bn, with exploration set at $2.5bn, in a third cut from an initial $35bn.

The company also said it expected to save another $1bn from its takeover of BG Group. Chief executive Ben van Beurden confirmed that Shell was cutting another 2,200 jobs after the BG deal, on top of the 2,800.

“Management's hardceiling on capex is a clear positive, in our view, although this commitment is likely to be tested over time,” RBC said.

“We see this commitment as significant, in particular for the dividend focused community, as many had likely feared that any oil price increase would ultimately lead to higher capex. While we do think this is likely to be the case for some oil companies, we think Shell’s focus on dividend sustainability means additional capex will have to compete with the buyback programme from now until 2020.”

RBC said it continues to believe Shell has some of the best project optionality in the peer group and its rigorous capital allocation process should support the investment case in the long run. The BG Group acquisition brings project optionality with the introduction of BG's Brazil assets and liquefied natural gas volumes likely to kick-start the high-grading process, the broker added.

In the short term, however, RBC said cash flows are likely to be outstripped by Shell’s capex and dividends so confidence on divestments could weigh on investor sentiment.

“We remain positive, and think Shell should remain a core energy holding for longer term investors.”

UBS reiterated a ‘sell’ rating and left its target price of 290p unchanged on betting group William Hill on Wednesday.

The bank said William Hill has lost market share in Australia amid fierce competition.

UBS said its own data showed Ladbrokes has grown significantly faster than William Hill over the past three quarters down under. Ladbrokes has wagered growth averaging more than 50% compared to an 8% fall at William Hill.

“The growth in Sportsbet, Ladbrokes and CrownBet over the last three years has intensified competition in the Australian online sportsbetting market, driving William Hill's market share from 34% to just 12% (of the digital market), and net revenue flat in 2015 versus 2013 despite the market growing at around 15% per year,” said UBS analyst Chris Stevens.

In March William Hill said it expected operating profit for this year to fall to between £260m and £280m, from £291m last year.

Chief executive James Henderson said dire horse racing results at Cheltenham and unfavourable European football results meant online revenues were about £15m worse than expected.

While the Australian Open in January had a positive impact, UBS believes William Hill continues to lag behind Ladbroke and other smaller competitors.

The bank also highlighted the impact on the sector of recent regulatory changes by the Gambling Commission in October to combat problem gambling. Online customers can now tell a bookmaker they want to take between 24 hours and six months off from gambling while keeping their account open.

Canaccord Genuity stuck to its ‘hold’ recommendation and 1,695p target price on WH Smith despite what it described as a “solid” third quarter trading update from the speciality retailer.

WH Smith´s sales rose by 2% during the third quarter of its fiscal year, alongside flat like-for-likes, the company said in a statement.

The star performer was the firm´s Travel segment, which reported a 3% increase in like-for-like sales and a headline increase of 9%.

Gross margins in-line with plan implied about 40 basis points of improvement for the full-year as a whole, analyst David Jeary said in a research note sent to clients.

On the High Street, the firm was still grinding it out, Jeary said, with like-for-likes down by 3%.

However, full-year gross margins were expected to grow by 110 basis points.

The final quarter of the year on the other hand would see the company trade against last year´s “50 Shades” and the Harper Lee publications, with no comparables titles this year, he pointed out.

Notwithstanding the firm´s “prodigious” cash generation, the shares were changing hands at a price-to-earnings multiple of 17.8 for 2016 and 16.5 for 2015, for an approximately 20% premium against the sector.

According to Jeary, it was a similar story in terms of the company´s enterprise value-to-earnings before interest, taxes, depreciation and amortisation, which stood at 11.7 and 11.2 for this year and next.

“This looks fully priced in our view.”