Broker tips: Stagecoach, Next, Tullow Oil

Investec upgraded Stagecoach to ‘reduce’ from ‘sell’ saying that while the outlook for the company remains negative in many areas, much of this is already priced into the shares.

The brokerage said it has adjusted its sum-of-the-parts valuation, removing Megabus Europe losses from its embedded value calculation and instead choosing to DCF the Megabus Europe business.

“Although our SoTP valuation rises to 276p, we choose to apply a 10% discount to reflect the ongoing downgrade cycle and significant rail re-bid risk,” said Investec, as it kept its 250p target price on the stock.

The brokerage said Stagecoach’s latest trading update was subdued again, mostly on the back of weakness in UK Rail.

It said implied trading in the eight-week period since the previous update was sharply softer, mainly due to the timing of Easter.

“Excluding this effect, Regional and London Bus trends are similar to those reported at the 40-week stage, though UK Rail has seen an underlying deterioration, due to weaker GDP growth and consumer confidence, as well as terrorism.”

Goldman Sachs downgraded retailer Next to ‘sell’ from ‘neutral’, slashing the 12-month price target to 5,000p from 6,400p, highlighting limited upside relative to peers.

“We expect the structural headwinds that are facing apparel retail from online channel-shift and trading down to stall Next’s EBIT growth,” the bank said.

Goldman also said the recent negative combination of declining UK average selling prices (trading down activity) and the early signs of declining apparel volumes, increase the chances that UK apparel demand could deteriorate further, rather than recover this autumn/winter.

Due to its more cautious view on Next’s earnings growth outlook, given the structural headwinds from increased online discount and international retail capacity, the bank has cut its target EV/EBIT multiple to 9x FY18E from 11.5x, in line with the group’s 10-year average. This is equivalent to an 8% free cash flow yield and drives the price target downgrade.

“We expect stalled Next Brand LFL gross profit trends from here, with any material growth only coming from the international online and the label businesses,” the bank said.

Barclays reiterated an ‘overweight’ rating and target price of 280p for Tullow Oil on Thursday after the oil producer reported its first quarter trading update.

The Africa-focused oil miner said first quarter production was slightly below expectations due to technical issues at the Jubilee field off Ghana, adding that 2016 capital expenditure would be cut by $100m to $1bn “with further savings expected”.

Group working interest production for the first quarter averaged 59,200 barrels per day for West Africa and 6,500 for Europe.

The company said it had to implement new Jubilee off-take procedures at the end of March following damage to a turret bearing.

Therefore, the group said full year 2016 average working interest production is likely to be below current guidance of 73,000-80,000 bopd and updated guidance will be provided when the new operating procedures have been fully implemented and stabilised.

“However, Tullow does not currently expect this issue to have a material impact on future cash flow, due to the imminent resumption of production and appropriate insurance policies in place,” the firm said.

The company also agreed a $3.5bn deal with its lenders to extend its borrowing facilities.

Barclays said the extension of the loan facility would "comprehensively address remaining concerns about the balance sheet”.

“The $1bn corporate facility has been extended by one year to April 2018 (commitments reduced to $800m from April 2017), sufficient to provide Tullow with at least $500m of financial headroom through 2017E,” it said.

The bank welcomed the cuts to capex and was also encouraged by news that Tullow’s Tweneboa-Enyenra-Ntomme (TEN) field off the coast of Ghana, which is due to deliver first oil this summer, is now 90% complete.