Broker tips: UBM, Premier Oil, Britvic

Berenberg upgraded business-to-business event organiser UBM from 'sell' to 'hold' on Thursday and upped its target price from 675p to 930p as risks to the fashion industry, the firm's largest sector, seemed "less relevant now".

Berenberg upgraded business-to-business event organiser UBM from 'sell' to 'hold' on Thursday and upped its target price from 675p to 930p as risks to the fashion industry, the firm's largest sector, seemed "less relevant" following Informa's bid for the company.

Instead, Informa was now taking on the risk to UBM's revenues and margins, the German broker said.

"Our current DCF valuation is c670p – if we took the £60m of synergies Informa is targeting by 2020, and applied its 14x 2019 P/E to the after-tax contribution from them this would add another c170p to our DCF – still below the Informa offer, which is c930p," Berenberg said.

"We therefore firmly believe that UBM shareholders should and will approve the bid," they said.

As a backdrop, Berenberg explained that investors had spent much of 2017 focusing on the underlying risks to UBM's business, particularly in fashion sector, but shares had rebounded in late 2017 as revenue trends in areas like jewellery improved, delivering headline results for the year ended 31 December "modestly above the original consensus".

Berenberg also noted UBM management's comments about "unusually high" levels of event launch activity, that helped boost its growth throughout 2017, but were not likely to recur in the current trading period, and that "some pruning is likely to continue", and that in terms of margins, the recent upward trajectory seen on that front "may not be easy to continue or even maintain" as management flagged the benefits from FX tailwinds and shifting costs to biennials throughout the year as major leg-ups, both of which were set reverse in 2018.

Premier Oil gushed higher on Thursday as RBC Capital Markets upped its stance on the stock to ‘outperform’ from ‘sector perform’ following recent weakness and the company's full-year results, keeping the price target at 100p.

The bank said Premier’s FY17 results underlined the progress made by the business last year, refinancing and delivering first oil from the Catcher field.

"Premier remains one of our preferred deleveraging stocks and following recent share price weakness we are upgrading to outperform ahead of material debt repayment H2/18 as production ramps up from Catcher and capex tapers."

RBC said that based on the current oil price of around $65 a barrel, FY18 guidance on production and capex, it expects net debt to reach around $2.25bn by YE18, with the net debt/EBITDA multiple moving below 2.5x, which is well within 3x covenants.

It also said that following the accelerated conversion of the convertible bonds, the company is likely to achieve compliance even at the $55/bbl average for 2018.

In addition to deleveraging, Premier has drilling catalysts, with appraisal drilling starting on the 400-800 million barrels Zama discovery as early as the second quarter of this year, depending on the rig contracting strategy. Meanwhile, four wells are planned over the coming 12/18 months on both blocks.

Analysts at Morgan Stanley upgraded their recommendation for shares of Britvic on Thursday from ‘hold’ to ‘buy’, explaining that the shares' current level provided an "attractive" entry point, given the outlook for several of the company's main financial metrics over the medium-term, including a projected quadrupling of its free cash flows.

In their research note, they revised their target price for Britvic up to 870p from their prior 680p estimate, telling clients Britvic was set to produce a minimum 15% return at the operating level, courtesy of the completion of its three-year "business capability programme" (BCP) that was set to end in 2018.

Morgan Stanley forecast "modest margin expansion" - of over 170 basis points at the EBIT level to reach 14.6%, over fiscal years 2017-2020 - driven by operating leverage in the underlying business and the group’s international business breaking even.

One potential pitfall was seen as the UK sugar tax, set to be imposed from April, which 28% of Britvic’s GB portfolio will be exposed to but the analysts believed the impact upon Britvic would be "muted".

The analysts justified that assessment by explaining that there was a more developed low/no sugar market in the UK than compared to other key markets where a sugar market had been implemented.

"The upcoming "sugar tax" has been an overhang for Britvic's GB division. However, a well-developed low/no sugar offering (Pepsi Max) and Britvic's overweight position in the on-trade segment give us comfort that the impact will only be relatively minor. Given the characteristics of Britvic in FY19 and beyond we feel that the market should now look beyond the uncertainty around the sugar tax."