Broker tips: Tullow Oil, Johnson Matthey, Kingfisher

Cantor Fitzgerald initiated coverage of Tullow Oil at ‘sell’ with a 342p price target.

The brokerage acknowledged that Tullow’s share price has seen a considerable decline over the last 12 months, but anticipates that there is more near-term pain to come for shareholders.

It said that an over-reliance on debt to fund risky ventures could prove costly.

“In the current climate, a shift in focus to expenditure on development assets at the expense of exploration is a sensible strategy; however this will require drawing down further debt finance against a backdrop of a volatile commodity price environment,” it said.

Cantor also said that any further production misses and/or unsuccessful exploration attempts will weigh on the company’s shares.

The key value drivers in Tullow’s portfolio stem from its Ghanaian asset base, said Cantor.

“However with much-publicised difficulties in this region both at a political and operational level, we expect little positive news flow to drive near-term share price growth.”

Although Johnson Matthey’s full-year results were broadly as Jefferies expected and a little ahead of consensus expectations, the main takeaway from the figures was the rise in working capital, said the broker.

“Adverse working capital movement conspired against our hopes for a return of cash as early as this set of results,” said Jefferies.

It said that some of that looks to be for good reason including inventory build ahead of first-quarter demand, but the steer for lower 70% average cash conversion in the years to come will need to be absorbed.

Citigroup also noted the rise in working capital and as a result, net debt.

“Net debt was at £994.4m up £265m due to a £433m increase in net working capital. This is a surprise,” said Citi. “We would think that NWC could be more tightly managed,” it added.

Citigroup said the results are solid and new guidance for the current year is in line with consensus expectations on an underlying basis.

"We would not expect any significant change in sentiment although the net debt is disappointing. In the next couple of quarters, the scope for outperformance seems limited,” it said.

Citi rates the stock at ‘neutral’ and Jefferies has it at ‘buy’.

Bank of America Merrill Lynch upgraded its stance on Kingfisher to ‘neutral’ from ‘underperform’ and raised the price target to 390p from 330p.

The bank’s ‘underperform’ rating was predicated on weak growth, negative earnings momentum, worsening sales densities at B&Q and continued poor performance in France.

However, Since November 2014, a new management team has been put in place, B&Q’s over-spacing issues are being addressed and a return of real wage growth in the UK has led to better profit growth in the UK operations, said BofA.

“B&Q like-for-like growth remains muted but is run rating ahead of our forecasts and is likely to be in positive territory again in 2016.

It said the company’s first-quarter results were slightly better than expected, with trends looking generally better across both like-for-like growth and profitability on average.

The bank upped its 2016 earnings per share estimate to 22.19p from 21.61p and its 2017 estimate to 24.13p from 23.48p.

It said the new target price strikes a balance between improving growth and potential for further returns of cash to shareholders against a premium valuation versus history.