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Broker tips: Victrex, Nostrum Oil and Gas, Tullow Oil, Mitchells and Butlers

By Iain Gilbert

Date: Wednesday 21 Aug 2019

Broker tips: Victrex, Nostrum Oil and Gas, Tullow Oil, Mitchells and Butlers

(Sharecast News) - Victrex got a boost on Wednesday as Barclays upgraded its stance on shares of the provider of high-performance polymer solutions to 'equalweight' from 'underweight', lifting the price target to 2,020p from 1,990p and highlighting 20% upside to consensus estimates for 2021 earnings per share.
Barclays noted that over the last year, consensus EPS has fallen by almost 20% in both 2019 and 2020.

"The combination of an optically high valuation with leverage into some of the toughest cyclical markets triggered a 44% share price correction," it said.

It said that while Victrex is still at the mercy of volatile market conditions, especially in autos and electronics, the bank's new no-deal base case for Brexit introduces "powerful mitigating forces in the form of a weaker GBP".

"We're loathe to pick stocks based on binary macro events but, equally, Victrex is a pure UK exporter so we can't ignore them either," it said.

Analysts at Berenberg double-downgraded Nostrum Oil and Gas on Wednesday after its hopes for "an operational turnaround" were dashed.

Berenberg, which lowered Nostrum from 'buy' to 'sell', said its expected turnaround for the group was based on its 2019 drilling programme in the northern area of the Chinarevskoye field in Kazakhstan, where the company had previously made an encouraging discovery.

However, one of Nostrum's two wells failed to flow at commercial levels, leading Berenberg to slash its target price on the group from 200p to just 25p as a result of "yet another operational disappointment".

With a total of three wells now lost due to earlier-than-expected water ingress, Berenberg raised significant questions about the productivity of the field and the validity of its proven and probable reserves, which led Nostrum's management to commission a geological study of the field, expected to show results closer to the end of the year.

"In the absence of further upside from the core producing area of the Chinarevskoye field, all hope was on the northern area, where Nostrum successfully brought a well into production earlier this year," said Berenberg, who also reduced its resource estimate for the northern area to 25m barrels of oil from 50m.

While Nostrum's gas treatment facility still held some strategic value, Berenberg noted that the group was facing some "significant" refinancing risks", with management likely to commence refinancing negotiations relating to its two outstanding bonds in 2020.

"This process will be challenging if an operational turnaround is not achieved by then," said Berenberg. "While there is potential for value creation through tolling agreements, time may be running out for Nostrum to put such agreements in place before refinancing negotiations."

Analysts at Canaccord Genuity raised their target price on shares of Tullow Oil following the oil explorer's recent success at the Jethro-1 exploration well offshore Guyana.

The timing could not have been better given Tullow's struggles in East Africa and still heavy debt burden, with the latter standing at $2.9bn as of mid-2019.

Now, the company could begin "reshaping" its future and shake-off financial markets' perception of it as only a geared play to the price of oil, the broker said.

Canaccord highlighted the multiple similarities between Jethro and the explorer's highly successful Jubilee field, estimating that it could be onstream in approximately four years.

It also highlighted the "appealing" fiscal terms on the projects in Guyana, arguing that they made for a "very atractive" proposition.

"Usually, we would not include exploration upside in our target price. However, we think it is merited where the potential is game-changing, and there is a substantial on-block discovery (Jethro) and one just-off (Hammerhead) - both of Lower Tertiary age - that derisk the prospect pool," the broker said.

"We anticipate heavy newsflow emphasis on Guyana in 2020. We would not be surprised to see four/five wells on Orinduik alone in 2020 (one/two Jethro appraisals, one Jethro Channel exploration wells, one/two further exploration targets)."

The broker revised its target price for Tullow's shares higher, from 260.0p to 280.0p and upgraded their recommendation for the stock from 'speculative buy' to 'buy'.

Elsewhere, Canaccord Genuity upped its rating on pub operator Mitchells and Butlers to 'buy' from 'hold' on Wednesday, stating that bids elsewhere in the sector had ignited a reappraisal of the group and its shares.

Canaccord, which also increased its target price for Mitchels and Butlers from 300p to 400p, said the agreed bids for Ei Group and Greene King at 38.5% and 51% premiums to their last undisturbed share prices were "reminders of the latent value of the asset-intense pubcos in general" and M&B "in particular".

"The bids may have been the catalyst for our reappraisal but are not the sole reason," added Canaccord. "M&B is now making good progress versus its strategic plan, driven by its Ignite self-help programme."

The Canadian broker pointed out that M&B has "an unusual and concentrated shareholder register", where a potential bidder would only need to make a few calls to gauge the appetite for an offer - with billionaire Joe Lewis owning around 27%, Elpida owning 23% and Smoothfield holding roughly 4.4%.

While a bid for the group was far from guaranteed, Canaccord stated that in the advent of a bid, it would expect a higher multiple, more akin to Ei Group's and Greene King's trailing exit EBITDA multiples of 11.4x and 10.0x.

Canaccord said it viewed M&B as "a long-term game", noting that the group should de-lever over the next decade as it looks to pay off £1.5bn of its £2bn of debt and invests in its top-line more than its dividend.

"M&B is starting to make real progress in reducing its debt burden and over the next five years it is scheduled to pay off £478m of debt, equivalent to a transfer of 23p/share per annum from debt to equity assuming no change to EV."

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