Broker tips: BHP Billiton, Petra Diamonds, Tullet Prebon

The bank said it had been cautious on miners due to weak demand, ongoing supply growth, stretched balance sheets, and a lack of free cash flow for most mining companies.

However, it said on Tuesday that demand has stabilised, supply is declining in most cases, balance sheets have strengthened due to FCF and asset sales, and valuations are inexpensive.

“Fundamentals have clearly improved,” Jefferies said.

The bank upgraded BHP on valuation, commodity exposure and better-than-expected free cash flow growth potential.

“Higher than expected prices for high grade (62% Fe content) iron ore fines, an improving outlook for high grade lump ore, an increase to our coking coal price forecasts, and our expectation for a recovery in the oil price have driven the upgrade,” Jefferies said, adding that BHP and buy-rated Rio Tinto are its top picks.

“BHP is a low cost producer with low operational risk, low geopolitical risk, good long-term growth potential and relatively high free cash flow through the cycle. We would buy BHP Billiton shares at the current level.”

Petra Diamonds shares edged higher on Tuesday as Canaccord Genuity reiterated a ‘buy’ rating and raised its target price to 165p from 150p.

Canaccord said Petra’s full year trading update on 25 July was ahead of its forecasts with a total diamond production of 3.7m carats (mct), compared to the broker’s expectations of 3.6mct. Petra reported annual sales of 3.45mct, beating Canaccord’s forecast of 3.43mct.

Average diamond prices dropped 6% against estimates for a 10% decline.

However, Canaccord said net debt of $387.4m at the end of 30 June, compared to $172.1m the same period a year ago, was higher than it expected.

“While the better-than-forecast trading update for fiscal year 2016 has resulted in a modest increase in our earnings before interest, tax, depreciation and amortisation (EBITDA) forecast, from $157M to $162M, we have increased our net finance costs (given that year-end net debt was higher than we had forecast), and have also changed our tax and minorities assumptions,” the broker said.

“As a result, for 2016 our net profit estimate falls from $50M to $37M, and our earnings per share (EPS) estimate drops from 9.2 cents to 6.8 cents.”

Looking ahead, Petra said it expects diamond production in fiscal year 2017 of 4.6-4.8mct, marking a 25-30% on the 2016 production.

As a result, Canaccord has upgraded its forecast from 4.25Mct to 4.73Mct for the year. The broker also raised its 2017 EBITDA estimate from $240M to $291M, net profit from $75M to $80M, and EPS from 13.9 cents to 14.8 cents.

“With a healthy increase in diamond production, and capital expenditure set to fall significantly, Petra Diamonds is well positioned to capture the benefit of improving production quality (as it mines more run-of-mine ore) and an anticipated gradual recovery in diamond prices.”

HSBC Global Research has maintained its 'buy' rating on Tullett Prebon and hiked it price target on the stock to 440p, from 400, citing good momentum and dividend yield.

HSBC also raised its earnings per share estimate for FY 2016 to 20.08p, from 19.48p, and for FY 2017 to 37.1p, from 34.46p.

"Furthermore, the (Tullett) shares offer a good yield of 4.7%."

HSBC saw the next potential catalyst for Tullett as the closing of the pending IGBB (ICAP's global broking business) deal in the fourth quarter of 2016, which could be announced in September or October 2016.

"While we have optimistic forecasts, we believe the shares are undervalued as consensus seems to ignore merger benefits, and we rate the stock 'Buy' due to convincing upside of 22%," it said.

It linked its hike in target price to an equity-value model based on 2018 estimates for the merged entity, forecasting a 13.4% return on equity.

Against this backcloth, the brokerage cut its growth-rate assumptions for interest rate derivatives from -4% to -6%.

"We believe that this is more than offset by better growth outlook for revenues from Energy & Commodities as well as Equities and Information Sales," HSBC said.

It forecast 3% underlying revenue growth in 2017 and 4% in 2018, along with declining costs.

"First of all, the broker compensation can be reduced by several measures and we decided to reduce our estimate for broker compensation by 0.5% for all years.

"Secondly, in terms of other costs, we now expect 34.2% (versus 34.5% previously) because the new Belfast IT centre will result in up-scaling of Tullet’s IT capabilities."