Broker tips: Sky, Cairn Energy, FTSE 100

Shares in Sky rose on Tuesday as RBC Capital Markets lifted its rating on the stock to ‘outperform’ from ‘underperform’ and raised its target price to 1,100p from 1,000p.

“Our view reflects (1) the lower share price; (2) de-risking of rights renewal in Germany; (3) upside from mobile rollout,” RBC said.

“The rise in the price target is partly driven by our forecasts for higher outer year earnings in GBP terms from Germany and Italy.”

Sky last month paid €3.5bn to secure the lion’s share of TV rights to German Bundesliga football matches. Earlier in the year the company also signed an agreement with Telefonica UK to launch a mobile virtual network operator (MVNO) on its network.

Meanwhile, RBC said Sky could arguably afford to buy O2 following the failure of the Hutchinson takeover deal but does not believe it will do so.

“In our view, its optimal strategy is to roll out the MVNO, gaining scale quickly through bundled offers to the c.40% of UK homes that take Sky. Later on Sky could look to buy spectrum directly to reduce marginal cost.”

“Mobile through MVNO offers substantial revenue and cost synergies without the need to spend say c.£9.1bn buying O2 (6.5x EBITDA - a discount which we feel is justified given the blocked Hutch offer at 7.3x and lack of alternatives for the seller).”

Sky can cross-sell mobile and sim cards to its own customers at extremely low subscriber acquisition cost, RBC added.

The broker raised its revenue estimates by 5.2% in full year 2017 and 5.8% in 2018, partly driven by higher euro translation against the pound from the German and Italian businesses, which account for 30% of group revenue.

Cairn Energy was on Tuesday downgraded by to a ‘hold’ rating from ‘buy’ and its target price cut to 220p from 240p.

The downgrade follows news that Woodside Petroleum has agreed to pay $430m for ConocoPhillips’ 35% stake in Senegal offshore oil joint venture, SNE, operated by Cairn Energy.

Woodside is paying $12.3m per percentage of working interest, which implies a cash valuation of $491m for Cairn's 40% holding in the assets covering three blocks offshore Senegal.

“That is substantially below our previous net present value estimate at $65 per barrel of light crude Brent of $747m,” said Canaccord analyst Charlie Sharp.

“The lower price may be through a combination of assumption of a higher discount rate, lower oil price, higher development risk assessment and/or capital expenditure. As the new potential development operator, there will be considerable focus on Woodside, and it is to be hoped that lessons have been learnt from the disappointing history of the Chinguetti field offshore Mauretania.”

The analyst added that the negative impact of the valuation is tempered by the recent strong market performance of Cairn India, which is still 9.7% owned by Cairn Energy.

However, Canaccord said it “cannot be sure how the recent Cairn India share price rally will hold up” so reduced its rating to ‘hold’.

Britain’s top-flight index was set to reverse recent gains to end the year lower by 7%, delivering a ‘reality-check’ for investors, strategists at HSBC said.

The harsh economic realities of Brexit would soon become apparent, taking the place of promises of further central bank stimulus, HSBC’s head of European equity strategy Robert Parkes toldBloomberg by phone.

“We’ve had the good news, but we have the bad news to come -- Mr. Carney’s handing out the paracetamol before the hangover kicks in.

“Even though the FTSE has big international exposure, we still have to remember that it’s got about a third exposure to the domestic economy -- not insignificant,” London-based Parkes told the newswire.

At the time of the writing, the FTSE 100 was standing approximately 7.3% up on the year.

“There is an unprecedented level of uncertainty on both of those issues. U.K. shares, including the FTSE 100, are in for a bumpy ride over the course of the next few months -- in a downward direction.”

Nevertheless, all of the strategists polled by Bloomberg forecast the Footsie would perform better than European shares, which in Parkes’s case meant he expected it to fall by less.

One small silver lining was that analysts had trimmed their estimates for the rate at which FTSE 100 constituents’ earnings would drop in 2016 from 8.5% to 4.7%.

To take note of, HSBC strategists were by far the most bearish on the prospects for the Footsie from among the seven canvassed by Bloomberg, with those from Natixis, Berenberg and SocGen expecting it to rise in 2016.

Barclays, Deutsche Bank and JP Morgan on the other hand were predicting falls of up to 2%.

HSBC’s forecast for the Euro Stoxx 50 was for a 22% drop in 2016 – also the most bearish prediction among strategists.