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The Expert View: Shell, Barclays and BHP Billiton
Our daily roundup of analyst commentary on shares, also including Pearson and Cineworld.
by Michelle McGagh on Mar 15, 2016 at 05:00
BG acquisition puts Shell in a strong position
Shell’s (RDSb) acquisition of BG will give it more levers to pull to weather the downturn in oil prices, according to Barclays.
Analyst Lydia Rainforth retained her ‘overweight’ recommendation and target price of £24.50 on the stock, as the oil major released its annual report. The shares were broadly flat at £16.75 yesterday.
‘A negative reserve replacement rate alongside negative finding and development costs rarely make for good reading in an annual report,’ he said. ‘All of this however can be explained by price effects and more encouraging for us was the 15% decline in upstream unit costs Shell was able to achieve in 2015.
‘Nonetheless Shell’s work is not over. The company managed to lose money within its consolidated upstream business for the first time on our records and its unit production costs are still materially higher than in 2005 when Brent last averaged in the $50s. We see the BG transaction as critical to help speed through much needed change and should further enhance Shell’s free cash flow profile in almost any oil price environment.’
He added that Shell was ‘not exempt from the squeeze in earnings and cash flow faced by the industry but with the acquired assets it is likely to have more levers than most to pull through the downturn’.
Barclays disposal allays capital concerns
The disposal of the African arm at Barclays (BARC) has put capital concerns to bed.
Haitong Research analyst Shailesh Raikundia retained his ‘buy’ recommendation and increased the target price from 250p to 300p. The shares were broadly flat at 165.7p yesterday.
‘The strategic actions by the new chief executive to dispose of the Barclays Africa stake, accelerate the run-down of non-core and reduce the dividend per share to 3p in 2016 and 2017 should allay capital concerns at Barclays,’ he said.
‘However, despite expecting higher 2016 losses in the enlarged non-core, we feel that the dividend cut, which saves £2.5 billion, was unnecessary given the capital generation capacity of the core franchise. Moreover, we see minimal dilution in returns from the sales of Barclays Africa with 2018 estimated core return on tangible equity of 11.8% when adjusted for excess capital.’
BHP acquisition list is limited
BHP Billiton (BLT) wants to grow its oil portfolio but the acquisition target list is short.
Deutsche Bank analyst Anna Mulholland retained her ‘hold’ recommendation and target price of 950p on the shares, which were broadly flat at 816.2p yesterday.
‘Following on from our June 2015 report on the options available to BHP to grow its oil portfolio… we analyse the potential assets in the Gulf of Mexico and Brazil which could be up for sale and meet BHP’s requirements,’ he said.
‘Our conclusion is that the list is short indeed and investors should temper expectations at this stage for any material acquisition in oil, with one or two exceptions.
‘We maintain our “hold” recommendation given BHP’s limited growth profile and modest upside to our target price.’ He added that the BHP focus ‘will remain on assets not companies’.
‘While BHP has opened the door on potentially acquiring companies, we believe the focus at this stage remains firmly on asset acquisitions,’ he said.
Cineworld a steadier bet than its peers
A good slate of films will help cinema chain Cineworld (CINE) this year but the strong management will help it even more.
Investec analyst Steve Liechti retained his ‘buy’ recommendation and target price of 660p on the shares, which jumped 3.3% to 500p yesterday.
‘Full-year 2015 results were good, with earnings per share and 6% above forecasts. We increase our previously low end of range forecasts,’ he said.
‘While this year looks unlikely to be vintage, Cineworld is confident and history suggests it can over-index versus slower markets. 2017/18 looks strong for industry film slates. However, the investment case is less about the film slate and more about strong management running a good UK business better – with margin upside.’
Liechti added that Cineworld was ‘well placed in 2016’ and the ‘well-invested business is less peak/trough orientated versus other lower capacity/lower returns UK peers’.
Bad book shop news for Pearson
Results from US college book shop chain Barnes & Noble Education last week do not bode well for educational publisher Pearson (PSON).
Liberum analyst Ian Whittaker reiterated his ‘sell’ recommendation and target price of 450p on the shares, which rose 0.6% to 877.5p yesterday.
‘A major US college book store business reported Q3 numbers last week and indicated it was seeing a number of structural headwinds in the sales of textbooks and materials in the US higher education market,’ he said.
‘This seems at odds with Pearson’s comments about “cyclical/policy” factors being the main reason for the problems it faces in its US higher education side, which we estimate is at least one-third of group profits. Reiterate as top ‘sell’.’
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Look up the shares
- Royal Dutch Shell PLC (RDSa.L)
- Barclays PLC (BARC.L)
- BHP Billiton PLC (BLT.L)
- Cineworld Group PLC (CINE.L)
- Pearson PLC (PSON.L)