Broker tips: Tullow Oil, Capital Shopping, Persimmon

5th Jul 2011 13:54

The first half update from oil firm Tullow was slightly negative, in finnCap's view, and the broker continues to see better options elsewhere in the sector.Production and revenues were both lower than expected, finnCap asserts, while underlying production guidance for the full year was cut, although the headline numbers were raised to take into account the effect of two recent acquisitions. "With few high impact exploration wells in H2 [the second half] and the stock continuing to trade at a significant premium to NAV [net asset value], we see better value and upside potential elsewhere in the sector," analyst William Arnstein said. "Sell Tullow; Buy Salamander and Premier," is finnCap's advice.The share price reaction to Persimmon's trading update was negative but Northland Capital Partners is keeping the faith, saying the numbers show that the house builder's recovery show remains on the road. "Forward sales are moving ahead of last year and with 70 new higher margin sites opened in H1 [first half] and another 70 scheduled for H2 [second half], the operating margin in the order book and further ahead is set to recover further. We have an operating margin forecast for the full year of 8.9% on flat unit sales and with the H1 margin at 9%, without the higher proportion of new sites in H2, we are comfortable with our estimates," Northland said. Northland's calculation of Persimmon's net asset value on the basis of its tangible asset assessment for 2011 is 570p per share, which offers considerable upside potential from the current share price of around 488p. "There are clear impediments to full recovery in the housing market but the group is showing how much can still be achieved through the process of self-help and controlled site expansion to derive higher margin sales in a flat market," Northland said. The broker thinks self-help measures will continue to boost margins well into 2012, as more higher margin sites replace older under-performing outlets. "The consensus forecast predicts around £129m pre-tax for the current year up from 2010's £91m; we are on £126m," Northland reports. "This position may deteriorate with a slowing pace of recovery if interest rates (not seen as a great hurdle) and unemployment move ahead faster than expected but there is a real opportunity now for Persimmon to demonstrate its land potential through margin growth and the success of its consistent and well tested self-help strategy," the broker concludes. Peel Hunt, a long-time bear on the sector, said the figures were a little softer than expected. "We had expected sales and prices to move ahead but both are down, but margins are 40-50 bps [basis points] better than forecast at 9%," Peel Hunt analyst Robin Hardy said. The lower than expected first half sales leave a lot to deliver in the second half, Hardy believes. "We remain concerned about the group's high regional exposure, the high use of shared equity and in common with its peers we see inadequate returns," Hardy declared. Peel Hunt rates the shares as a "sell" and has a price target of 299p.The prospects for an earnings recovery at shopping centre development outfit Capital Shopping Centres are becoming increasingly challenged, according to Credit Suisse. So much so that these analysts now question, "whether the Capital Shopping Centre's business can indeed make a full recovery as the structural landscape of UK retail is adversely changing for the worst, and retail landlords will need to restructure their portfolios to remain ahead." The above is the result of what they describe as the "labouring UK economic recovery", which will likely defer, perhaps permanently, the earnings recovery, which in turn would lead to relative share price under-performance when compared to its UK real estate investment trust (REIT) peers. For that same reason, analysts at Credit Suisse have decided to downgrade shares of Capital Shopping Centres to 'under-perform', from their previous recommendation of 'neutral'. Their price target, however, has been nudged up, to 390p, from 380p. All is not bad news, apparently, as Credit Suisse adds that, "over the next 12-18 months, we would not be surprised to see some valuation weakness in asset prices outside of CSC's 'uber-prime' front line, although the relative weighting of the top four centres at 62% of total portfolio by value may be sufficient to protect the NAV, the ultimate driver of share price direction."--jh