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Broker tips: Computacenter, Petrofac, Rio Tinto, Hargreaves Lansdown

By Iain Gilbert

Date: Thursday 10 Sep 2020

Broker tips: Computacenter, Petrofac, Rio Tinto, Hargreaves Lansdown

(Sharecast News) - Higher demand for business continuity services appears to have become a structural trend for Computacenter, Barclays said as it increased its price target for the IT infrastructure company.

After a series of profit upgrades, further improvement was possible in the second half but not highly likely, Barclays said. The bank kept its 'equal weight' rating on Computacenter shares and increased its price target to £21 from £16, reflecting an earnings upgrade to £1.15 a share from 91p a share.

Barclays said it was not "chasing the shares", which have hit a record high. The shares rose to a new peak of £24 on Thursday and were up 3.9% to £23.58 at 13:37 BST.

Computacenter announced the £140m acquisition of Canada's Pivot with Wednesday's trading update. Barclays said the deal had "a few wrinkles" but that the price was attractive and the deal would double Computacenter's US footprint.

"Computacenter's performance is very impressive," Barclays said. "FY21 is harder to project, with an uncertain economic outlook, tough comparatives and business continuity challenges having been solved by businesses this year, but it is arguably premature to worry about that."

Analysts at Bernstein downgraded oilfield services provider Petrofac to 'underperform' on Thursday, citing increasing concerns that risks threatened to "engulf" the company.

Bernstein, which only recently lowered the stock to 'market perform', said worries an investigation from the Serious Fraud Office would continue to suppress new work, increased net debt and a "too optimistic" sell-side had all led to its decision to drop its rating on the firm yet again.

The analysts said they were "sufficiently concerned" about working capital, stating current outstanding invoices represented the "largest amount of money owed" in the company history - with around 214 days of sales yet to be received.

In turn, Bernstein stated this meant Petrofac now owed the most money to suppliers in its own history.

"The combined value of these balances - $5.7bn on an absolute basis - is more than 10 times market cap," said Bernstein, which also cut its target price on the stock from 170.0p to 110.0p.

"For an E&C company already suffering material loss of work from the SFO investigation, we consider operating in such extremes of working capital is a material risk."

As far as the SFO investigation was concerned, Bernstein added that "nobody knows" how it will turn out, but noted that there was a good chance it would spell the end for chief executive Ayman Asfari.

Citi upgraded Rio Tinto on Thursday to 'buy' from 'neutral' and hiked the price target to 5,300p from 4,600p as it argued that the case for expanded capital returns has strengthened.

The bank said that while it expects a modest price pullback in iron ore in the near term, it now forecasts benchmark iron ore to stay in a range of $100-$120/t for the balance of 2020, given that ongoing strength in China now drives a more broadly balanced seaborne market, versus a notable surplus previously.

Citi also lifted forecasts for 2021-23 based on a more constructive Chinese steel demand outlook.

It said its discounted cash flow valuation increases by 20% to 5,200p a share on a higher long-term iron ore price of $60/t.

"We believe Rio shareholders can benefit from strong balance sheet coupled with high leverage to iron ore pries driving near term cash generation (FCF of more than 9% over the next three years)," it said. "We see a further potential for special dividends."

Deutsche Bank upped its rating on shares of investment platform Hargreaves Lansdown to 'hold' from 'sell' on Thursday, lifting the price target to 1,600p from 1,425p as it said the improved flow outlook better justifies the price.

Deutsche said the recent FY20 results provide clear evidence of the strength of the Hargreaves Lansdown business model.

"Despite the reputational headwinds of 2019, its market share has remained resilient and there is continued investment into the business to support both current and future growth," the bank said.

It also said the outlook for flows looks brighter, given increased investor engagement and the surge in customer numbers during the lockdown.

"Finally, though there are margin headwinds including a substantial threat to the cash margin and sub-benchmark performance issues in the HL multi-manager funds, these are mitigated near term by our belief that the shares revenue margin will stay higher for longer (above 30 basis points for the next three years) due to elevated trading activity."


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