Broker tips: Home Retail, Smiths Group, Genel Energy

21st Oct 2015 16:57

(ShareCast News) - Home Retail's interims did little to dispel the doubts of analysts at Canaccord Genuity about the ability of the company to turn around the financial performance of its Argos division."The investment case on the shares hinges on a view of Argos, with Homebase in effect something of a sideshow. While we believe Argos's embracing of a digital future is the correct strategy, we have concerns on its ability to transform its financial performance," analyst David Jeary said in a research note sent to clients .Initiatives such as its new next day "Fast Track" delivery service and increased marketing spend will boost costs before any longer-term benefits flow through, Jeary added.Indeed, had it not been for £8m in timing benefits then Argos, the company's general retailing arm, would have reported a £2m operating loss.The company is a late arrival in the digital space and there is intense competition, the broker said.The stock's approximately 25% discount to its peers on a price-to-earnings multiple basis, "clearly reflects market doubts on the group's ability to deliver a sustainable improvement in its profit delivery over the medium- and longer-term".Canaccord Genuity placed its previous investment recommendation of 'hold' and target price on the shares under review. Smiths Group got a boost after Citigroup raised the stock to 'buy' from 'neutral' and lifted the price target to 1,200p from 1,050p to reflect an improved pension position and stability in the medical and detection businesses .The bank said it sees several areas of upside optionality at Smiths which the market is not pricing appropriately.Citi said a new chief executive offers a fresh perspective to address Smiths' corporate strategy, reassess medium-term targets in light of low global industrial growth and develop options to realise value."Portfolio action and self-help, through further cost and working capital rationalisation, provide opportunity, with support from recent (and ongoing) investment and research and development."In addition, it noted that the pension position has markedly improved versus recent years, providing additional strategic optionality or least lower barriers to portfolio change.The bank also pointed to operational improvement in terms of margins, selling, general and administrative expenses, working capital and return on capital employed. UBS downgraded Genel Energy to 'neutral' from 'buy' and cut the price target to 400p from 500p, highlighting concerns that an increasingly complex geopolitical landscape is raising the risk profile of the gas business .UBS said Genel's portfolio can be neatly split into two: an oil business and a gas business.The bank said there appears, after some delay, to be a tentatively workable oil export payment mechanism, with the Kurdistan regional government having made two monthly payments to contractors.UBS said this should see Genel's cash cycle move positive through the second half of the year.On Tuesday, Genel said it received total payments of $45m from the Kurdistan regional government, having suffered payment delays for years as it got caught up in a revenue-sharing dispute between regional authorities and Iraq's federal government."However, to see decent upside in the stock one needs unwavering confidence that firstly, oil payments ramp-up smoothly; and, secondly, its unsanctioned 8.4TCF Miran/Bina Bawi gas export project will progress to plan."The bank pointed out that this is Genel's key growth asset and biggest by value.