Broker tips: Ocado, Tullow Oil, M&S
By Iain Gilbert
Date: Tuesday 10 Dec 2019
(Sharecast News) - Analysts at Berenberg nearly doubled their target price for grocer Ocado as they upgraded the recommendation for the group's shares to 'buy' on Tuesday.
Berenberg said Ocado had transformed from a pure-play UK online grocery into a global provider of e-commerce solutions in recent years, adding that with online grocery at "a tipping point", grocers needed to review their online propositions.
With this in mind, the German broker said that Ocado looked primed to capitalise.
With UK retail representing less than 10.0% of Ocado's valuation, Berenberg believed that concerns about the M&S transition were "overdone".
"Our proprietary survey of 160 items indicates that M&S is 1% cheaper than Waitrose. Moreover, our Online Grocery Success Framework shows that Ocado has a far superior online proposition, and Waitrose lacks the financial flexibility to invest online," said the analysts.
Berenberg values Ocado retail at £1.86bn - ahead of the £1.5bn valuation implied by the 50% stake sale to M&S and said that with shares being dragged down by unjustified concerns about the group's partnership with Kroger, it now sees "an attractive entry point".
"Its best-in-class technology and spectrum of fulfilment solutions are key differentiating factors versus peers," highlighted Berenberg, which jacked up its price target on Ocado from 876.0p to 1,635.0p.
Analysts at Canaccord Genuity slashed their target price for shares of Tullow Oil following the explorer's "disastrous" update.
During the previous session, Tullow cut its outlook for production from the TEN field offshore Ghana, suspended its dividend pay-out and announced the exit of various senior managers.
In a research note sent to clients, Canaccord's Charlie Sharp explained that the former was the main reason behind the ensuing share price drop, as it would cut the company's free cash flow, restrain its exploration plans and raise material concerns about its ability to meet its debt repayments which "become onerous from 2021 onwards".
As in other episodes in the past at other trouble exploration companies, the analyst was left anticipating a "dramatic" reduction in Tullow's capital expenditures, credit maturity extensions, asset sales and a rights issue.
"Further asset underperformance and/or weaker oil prices would raise the balance sheet stress especially in 2021 when the debt repayment schedule ramps up. Outlook for equity: hairshirt at best," Sharp said.
Canaccord cuts its recommendation for the shares from 'speculative buy' to 'hold' and its target price from 220.0p to 60.0p.
RBC Capital Markets upgraded its rating on shares of Marks & Spencer on Tuesday, saying it expects the retailer to outperform a challenging market thanks to its price investment in "high volume lines", less confusing promotional activity, a stronger new innovation pipeline and higher marketing spend.
RBC upped M&S shares to 'outperform' from 'sector perform' and hiked the price target to 230p from 200p.
"We see potential for sentiment to improve on M&S driven by 1) A continuation of positive like-for-like sales trends in Food 2) Clothing outperforming depressed H2 market expectations and 3) The market better appreciating M&S' cashflow generation and potential Ocado JV benefits," it said.
RBC said the stock's valuation is "undemanding" at circa 10x CY20 price-to-earnings.
The bank noted that M&S had a much stronger start to Autumn/Winter in the clothing segment, with LFL sales up around 5% in October, helped by improved availability, more frequent deliveries to stores, improved communication between merchandising and buyers and a relaunch of Per Una.
"Although we expect this to fade over the course of H2, consensus expectations of negative LFL sales look very conservative to us," it said.
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