Broker tips: ITV, Randgold Resources, Pennon

13th Jan 2017 13:56

(ShareCast News) - ITV got a boost on Friday after Goldman Sachs added the buy-rated stock to its Conviction List, saying its is one of the most likely M&A candidates in its coverage, as it took a look at the European media sector.It noted the stock has been one of the worst performers in its sector coverage, down 19% versus the STOXX Media and down 31% versus the FTSE 250 in the last 12 months, mainly owing to Brexit-related issues.The bank said that while political risks remain significant, the risk -reward is compelling. GS said it reckons company-compiled consensus already factors in a bear scenario, with -5% advertising growth for 2017.GS's top-down analysis, latest trends and retail results, as well as conversations with media buyers, point to better ad trends, leading it to revise its ad forecasts from -3%/-5% to -2.5%/-2.5% for 2016/17.In addition, the bank highlighted the M&A potential given ITV's content ownership and GBP weakness."We note that Liberty Global currently owns a 10% stake and its CEO recently noted in a press conference (January 6, 2016) that he sees free-to-air investments (such as the ones Liberty has done in Belgium/Ireland) as more attractive than buying studios, given European content is more fragmented and most of the viewership (70%) is still FTA in Europe."Finally, it highlighted an attractive valuation, with the shares at a 20% discount to their 10-year median and offering a 5% dividend yield. Berenberg on Friday upgraded Randgold Resources to a 'buy' rating from 'hold' and raised the target price to 7,400p from 7,190p, saying the miner is a "quality gold asset, attractively priced".The broker said the upgrade follows a 30% drop in Randgold's stock price from its mid-2016 peak and an improved long-term project visibility. The new price target implies a 13% upside."We consider Randgold as a high-quality long-term gold play, currently mispriced by the market's short-termism and focus on spot gold price movements," Berenberg said.Randgold holds a "strong" resource base in its operations in central Africa with 2P reserves of 15m ounces with an "attractive" grade of 3.6g per tonne and plans to increase its gold output by 29% to 1.6m oz by 2020, Berenberg noted.It is also growing its own mineral base with management in late 2016 announcing plans for three new mines in five years. Randgold also highlighted potential projects that will be driving output volumes from 2020.Output volumes from the Tongon mine, at 260,000 oz per annum, will be replaced by volumes from the Senegal-based Massawa project with 2.9m oz of gold reserves and 3.7grammes per tonne of ore grade.Other projects include one in the Ivory Coast near the Tongon mine and another in north-east DRC, near the Kibali mine.On the company's balance sheet, Berenberg said: "In stark contrast to its industry peers, Randgold has no debt, with an estimated end-2016 net cash position of $290m."The cash pile is set to grow to $2.3bn by the end of 2020, assuming a gold price of $1,200/oz, according to Randgold management's estimates. With capex peaking at $270m in 2017, we expect a 2017-18 free cash flow yield of 3.5-3.7% and a 2017-18 dividend yield of 1.0%." Credit Suisse has downgraded environmental utility infrastructure company Pennon Group to 'underperform' from 'neutral' and lowered the price target to 680p from 800p.The broker said that the downside in energy-from-waste (EfW) is materialising faster than it anticipated and it sees risk of a potential liability associated with an unconsolidated financing joint venture.The risks the bank forecasts with EfW include local authority counterparty risk, exposure to competitive pricing which analysts predict will intensify from 2020, execution risk on construction of the Glasgow pant and financing risk with a potentially expensive new hybrid. It added that it sees no drivers of sustainable medium-term upside to pricing.The earnings per share forecast fell to 35.59p from 36.69p for 2017.The cut in EPS by 3-4% and price target is primarily due to the bank's valuation of the company's subsidiary Virador, including the Greater Manchester contract and Avonmouth EfW.It also points to the company's Peninsula MB joint venture, estimating that loss of tax credits could reduce earnings per share (EPS) by around 7 to 10% per annum going forward.On the plus side the bank values the company's second subsidiary, South West Water (SWW) at a premium to reflect outperformance among its peers but sees bond yields as the main near term driver for UK Water valuations.