Broker tips: Tullow Oil, Esure, Berendsen, Hastings

Shares in Tullow Oil gushed higher on Tuesday as Deutsche Bank upped its stance on the stock to 'buy' from 'hold' and lifted the price target to 330p from 270p, saying the current price offers an attractive entry point.

DB noted that Tullow has underperformed its peers by around 20% year-to-date.

"If you've been sitting on the fence, we think the current share price offers an attractive entry level to invest in a material and recapitalised bellwether of the European exploration & production sector.

"Tullow offers geared commodity exposure for investors with a constructive outlook on the oil price, as well as long-term optionality and growth in a deflationary international E&P cost environment (unlike the US unconventional space)."

Deutsche said the rights issue allows Tullow to wrestle back control of its free cash flow from the banks and let its equity story take centre stage.

Last week, Tullow announced plans to launch a £607m rights issue at a 45% discount to its current share price as it looks to shrink its debt burden.

"The $724m net proceeds from the rights issue should now free Tullow from the restraints that may have been imposed by its banking syndicate in a flat commodity oil price environment. We also estimate that Tullow will save circa $75m in fees and interest charges over 2017-18, as well as removing the need to stretch covenant waivers," DB said.

Esure

Citi downgraded Esure to ‘neutral’ on Tuesday, saying it sees little scope for outperformance in the insurer’s 2017 guidance.

The broker downgraded the FTSE 250 company from ‘buy’ but hiked its target price to £2.35 from £2.25, as although it is confident in Esure’s growth outlook it said it sees little room for outperformance, and that further earnings per share upgrades were unlikely.

Esure is targeting growth between 15% and 20% for this year, and Citi believes that while the lower bound is achievable, it will be a stretch to exceed the upper end of the range.

It forecasts premium growth of -16.5% driven by favourable motor pricing, new business growth from its websites and the expansion of its product footprint.

Citi also expects that that its combined ratio could face some pressure in the future. It forecast a combined ratio of 97.3% for 2017, which is line with Esure’s guidance of 95% to 98% and marginally above the consensus.

It expects weak top-line development in the home division; higher acquisition costs due to the high volume of new business growth; potentially higher reinsurance costs at 1 July renewal, and likely lower reserve releases going forward.

But Citi said it does think that the higher Solvency II base will give capital flexibility as Esure’s 201616 Solvency II ratio of 149% was at the upper end of the targeted range between 130% to 150%.

“As a result, we believe that the group can both maintain business growth and offer attractive dividends”, Citi said.

Berendsen

Shares in commercial laundry company Berendsen were under pressure after Barclays cut the stock to 'underweight' from 'equalweight' and slashed the target price to 700p from 911p.

The bank pointed to elevated levels of execution risk and questions over the merits of a meaningful step-up in growth capex.

Barclays said that less than 18 months on from a strategic review that reported a “well invested” business with “strong foundations” and committed to free cash conversion of 75- 90% and a double-digit return on invested capital, Berendsen has reported significant operational issues in the UK.

It noted the sizeable increase in capex which decimates the cash conversion target and sees ROIC back into single figures for at least the next few years.

"While we do not dispute the need for a step-up in capex to address previous underinvestment, we are (a) slightly alarmed by the initial assessment of the situation in November 2015 and (b) slightly puzzled by the additional growth capex plans – has the view of end markets changed so much since the strategic review in November 2015 that a £150m+ increase in capex is merited for a business which has historically grown only slightly ahead of GDP?"

The bank said undertaking a major capex programme is a challenge for any business but is even trickier to execute while churning around 40% of the UK managers, embarking on a major re-training exercise for existing employees and putting in place a series of new systems.

Hastings

Credit Suisse initiated coverage of insurer Hastings at 'outperform' with a 290p price target.

The bank said it expects to see top-line driven operating earnings improvement, while debt and capex reductions should underpin growing returns to shareholders.

It forecasts double-digit dividend growth over the medium term.

CS noted that Hastings is aiming to reach a 3 million policy count by 2019 versus 2.35m as of FY16, and said this target is comfortably attainable, aided by motor industry pricing tailwinds. The bank forecasts policy count and operating profit to grow at a three-year compound annual growth rate of 9%.

"We expect strong cash flow growth to be driven by lower debt and interest costs and reduced capital expenditure. Accordingly, we forecast free cash flows (exclusive of dividends) to grow to c3x the size of those in 2016. This should enhance capacity for additional capital returns to shareholders over the medium term."

Credit Suisse added that the current valuation gap of more than 30% versus peer Admiral is excessive given Hastings' superior dividend and earnings growth prospects.

S&P 500

Analysts at Barclays set a 2,525 point year-end fair value target for the S&P 500 in anticipation of the US administration's spending plans, which they said would act as the "key" fulcrum in determining the benchmark's value.

A weighted average of three different possible fiscal policy scenarios would contribute 75 points to the S&P 500's closing level in 2017, the broker explained..

Indeed, in their worst-case scenario the S&P 500 would fall to 2,170, while in an upside scenario it could rise to 2,750 points.

The analysts attached a 20% probability to the first case and 50.0% odds to the latter, telling clients that fiscal asymmetry was tilted to the upside.

As ever, stocks were prone to a correction at some point over the course of the year due to the natural ebb and flow of data and politics, they cautioned, adding that politics in the States remained "fluid".

Nonetheless, "the S&P 500 has finished higher than March levels 90% of the time after a positive start to the year; solid fundamentals and a tax proposal point to further upside," they said.