Broker tips: Tullow, AB Foods, Hays

9th Jul 2009 13:09

Irish oil company Tullow Oil's recent share price weakness merely reflects the slide in the price of crude, Morgan Stanley believes, and the US bank reckons the company's prospects look good over the medium term.Tullow's exciting discoveries in Uganda and Ghana are set to drive future earnings growth, while the legacy assets in the UK and Gabon are worth 800p per share, Morgan Stanley calculates. The US bank further estimates that the exploration programme over the next half year could add another 800p to the net asset value of the company.Not surprisingly, Morgan Stanley recommends an "overweight" position in the shares and had a price target of 1225p.Primark remains the main engine of growth at Associated British Foods as all other parts of the business reported slowing sales growth in the third quarter of the group's financial year.Jeremy Batstone-Carr at Charles Stanley said the trading update was broadly in line with expectations and "reasonably upbeat" but he still advocates selling the shares."The cautious comment relating to little growth in full year earnings is likely to limit the scope for a favourable share price reaction in the wake of outperformance against the sector over calendar Q2," Batstone-Carr believes.The broker reckons there is "better scope for outperformance" elsewhere in the sector over the half-year reporting season, and suggests clients switch into Unilever ahead of the Anglo-Dutch household goods giant's second quarter update on 6 August.Graham Jones at Panmure Gordon is a fan of Associated British Foods, however, and believes the trading statement supports his view of a return to strong earnings growth next year.The broker has raised its price target from 790p to 810p on expectations of solid growth in the Retail and Sugar businesses and a better performance in Grocery. After its chief executive Alistair Cox said in an interview with the FT this week that he saw no end to the "brutal job market", the market was braced for terrible figures from recruitment firm Hays and was not disappointed, though opinions differ on where the company goes from here.Singer Capital Markets rates the shares a "buy", though the fact that the stock's prospective dividend yield has risen above 7% suggests the market is sceptical about the group's ability to maintain the divi, but Singer believes the scepticism is misplaced thanks to the group's strong cash flow and balance sheet strength. Charles Stanley is more ambivalent about Hays's prospects and has a "hold" recommendation on the shares. "In terms of valuation, with little visibility it is difficult to make firm forecasts so valuing Hays on an EV [enterprise value]/Sales ratio of 0.5x gives a tentative price target. On this basis, with potential sales of under £2bn in 2010, the market value looks broadly about right," the broker believes.Completing the range of views, Panmure Gordon is a seller. "This Q4 update is consistent with our current expectations, and we leave our forecasts unchanged, suggesting a P/E of just over 10x rising to over 14x for 2010. We believe this suggests a recovery in markets is expected in the near future, which in our opinion couldn't be further from the truth," the broker stated.