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Broker tips: Shell, Close Brothers Group, Aston Martin

By Alexander Bueso

Date: Friday 25 Sep 2020

Broker tips: Shell, Close Brothers Group, Aston Martin

(Sharecast News) - All is not well at Royal Dutch Shell, Citi said as the bank reiterated its 'sell' rating on Britain's biggest oil company.
One of the main messages from a dinner with Shell's management was that trading remains difficult in the third quarter, Citi's Alastair Syme said. Syme kept his 'sell' recommendation and target price of £11.80 on the FTSE 100 company's shares.

Liquefied natural gas prices and refining margins are very low and Shell has had problems managing full utilisation of upstream assets because of Covid-19 and weather related downtime, Syme said. Shell's shares have more than halved in 2020 and at £10.04 at 15:09 BST are not far above the low they sank to in March as oil prices plunged.

Shell has promised to respond with "Project Reshape' which is expected in early 2021 and is billed as a fundamental rethink about how to operate during the transition to cleaner energy, Citi said. Shell acknowledges that many new energy companies are smaller, faster and more digital.

"The share price chart of RDS shows you that all is not well," Syme wrote in a note to clients. "We did not get a sense of how Project Reshape will be measured, ie what KPIs [key performance indicators] will be given to the market."



Jefferies increased its price target for Close Brothers but kept its 'underperform' rating, arguing the bank lacks the competitive edge it had in the last recession.

Close Brothers increased lending and its net interest margin after credit markets seized up during the financial crisis but this will not be repeated, Jefferies' Julian Roberts said. The Covid-19 crisis has hit demand for loans whereas the financial crisis squeezed supply to Close Brothers benefit, he said.

The bank's net interest margin has narrowed since the March lockdown and continued to do so even as lending started to recover in June and July, Roberts said. Close Brothers continues to lend prudently without chasing growth over credit quality but few of its rivals have funding problems and credit markets are open, he said.

"Without the pricing power to compensate it for taking on more risk, we think CBG will not see the high growth of FY10-FY12, nor will it see significant NIM [net interest margin] improvement (although we would expect a slight improvement as lending volumes normalise)," Roberts wrote in a note to clients.

Analysts at JP Morgan now expect the Aston Martin to burn cash at a faster rate and continue to see uncertainties regarding medium-term funding but kept their recommendation at 'hold' until the incoming chief executive officer lays out his plans to address the situation.

In a research note sent to clients, the investment bank raised its estimate for the carmaker's cashburn in 2020 by £150m and cut those for its earnings before interest, taxes, depreciation and amortisation in 2021-22 by approximately 10% on average.

Yes, Aston had addressed its short-term liquidity needs, but how "management intends to finance cash outflows in the medium term or fund growth over the long term remains uncertain" remains to be seen.

Furthermore, two of its top three shareholders had diluted their stakes and further dilution ahead of a debt refinancing scheduled for early 2022 was possible.

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