Broker tips: Centrica, RSA Insurance, Aveva

28th Jul 2015 17:09

(ShareCast News) - Investec upgraded shares of Centrica to 'buy' from 'hold' and raised its price target to 300p from 250p for two reasons.Firstly, it said fear of a potential 'black sky' restructuring of the UK energy sector has now abated. Secondly, an imminent strategy day gives Centrica the chance to resets its business model to meet new market and regulator realities, with greater capital and operating focus.Investec expects the immediate focus of the strategy day to be on the two main headwinds for Centrica's business model: regulatory/efficiency challenges in its core UK downstream business and low energy prices upstream.It argued that efficiencies are both desirable and feasible in both areas. "Upstream, we expect further capex cuts and deeper operating cost cuts than those already announced. In UK downstream, we see competitive and regulatory pressures driving £200m+ operating efficiencies, but the pace of capex will increase, as downstream markets are transformed."Investec said that whatever strategic path the new chief executive sets will take time to execute, but should put issues of governance, customer engagement and environmental leadership at its core.The power portfolio needs to be restructured, but can act as a base for a more radical, low-carbon generation fleet in future, it said.Investec said further valuation upside for Centrica will depend on the successful execution of such a strategy, and on no further deterioration in underlying fossil-fuel prices to which its earnings are ultimately correlated. With a potential bid now on the cards, Canaccord Genuity raised its rating on RSA Insurance to 'buy' from 'sell' and upped the target price to 500p from 385p, which is a 10% discount to the offer price that's been talked about.Zurich Insurance announced on Tuesday that it was weighing a bid for the company, although RSA later said it was not in talks with Zurich and had not received a proposal."We think 550p would be a fair offer for RSA, but think there must still be a material risk that no offer is forthcoming, or that part of the offer is in Zurich shares, which come under some pressure," said Canaccord.The broker added that with RSA progressing slowly through its recovery, and weighed upon by a large pension liability, its shareholders were likely to want an offer at a material premium, given its value on a sum of the parts basis."While we expect Zurich shareholders to be cautious in their response, reflecting management's lack of track record in a deal of this scale, and the material long tail and pension liabilities that would be brought onto Zurich's balance sheet, there would likely be material synergies," said Canaccord.It noted that a purchase would give Zurich a leading position in the UK, add materially to Latin American scale, and give entry to two attractive markets, i.e. Canada and the UK. Goldman Sachs upgraded Aveva to 'neutral' from 'sell' and raised the price target to 2,450p from 1,300p following the company's deal with Schneider Electric.It noted Aveva's announcement earlier in the month that it plans to acquire Schneider Electric assets in what will effectively be a reverse takeover and said it was upgrading its rating and price target to balance the accretion it sees possible to Aveva's standalone earnings per share with end-market headwinds and any near-term disruption from integration.In addition, Goldman pointed to the fact that since being added to the 'sell' list on 3 November, Aveva shares are up 54% versus the FTSE World Europe up 5.8%.It maintained its view that downside risks to standalone Aveva estimates have not cleared, particularly on the top line, given continuing headwinds in its primary end-market of Oil & Gas."While Schneider's software assets would increase Aveva's scale and addressable market, our pro forma analysis suggests near-term margins are diluted," it said.Goldman said its analysis of incorporating Schneider Software assumes minimal revenue synergies given end-market headwinds.It noted that Schneider Software management stated it is experiencing delays in order intake and contract start-up especially in projects linked to the oil price, which it expects to continue through to full-year 2016.However, the bank reckons Aveva would still be able to extract cost synergies through a combination with Schneider Software driven primarily drive by the optimisation of general and administrative expenses.Incorporating its estimate of potential cost synergies and the new equity issuance, GS forecasts accretion of around 10%- 15% to Aveva EPS beyond full-year 2018 as the full run-rate of cost synergies start to kick in.