RBC Capital Markets upgraded BP to ‘outperform’ from ‘sector perform’ on Friday and lifted its price target on the stock to 450.0p from 430.0p.
The Canadian bank said the fundamental problem BP had in 2020 was that at $40 per barrel of oil, it looked extremely challenging to build a new business while maintaining competitive returns to shareholders.
“On a higher commodity deck, life gets a bit easier,” it said. “We still have some concerns around capital allocation…but ultimately the pivot made in 2020 will take a number of years to be proven right or wrong. In the meantime, the core business should continue to drive the investment case.”
RBC said its “bullish commodity price deck” suggests the company is likely to generate significant free cash flow in the coming years. It noted that BP plans to return at least 60% of its surplus free cash flow to shareholders via buybacks over time, in addition to its dividend.
“On our deck, which calls for more than $100/bbl oil this year, we see BP returning 12.4% to shareholders in 2022, the highest in the sector,” it said. “Over the next five years, we see the potential for investors to receive more than 50% of BP’s market cap back via dividends and buybacks, again the highest in the sector.”
RBC said that on its our assumed buybacks of $8.0bn in 2022, BP could be purchasing around 12% of shares on a daily basis through the year on average.
JPMorgan Cazenove upgraded BAE Systems on Friday to ‘neutral’ from ‘underweight’ and upped the price target to 630.0p from 555.0p as it argued that Russia’s invasion of Ukraine had changed the defence landscape.
JPM said the invasion of Ukraine may have two consequences for defence stocks.
“First, the US and Europe may decide they need to spend more on defence. Second, investors may reassess the role that defence plays in protecting peace and democracy, leading to multiple expansion and a re-assessment of the ‘ESG discount’ that has weighed on defence stocks in recent times,” it said.
The bank said that prior to Russia’s recent actions, it believed that European defence spending would grow at a low-to-mid single digit level and the US defence budget would grow in line with a “normal” level of inflation.
“It is too early to know whether Russia’s invasion of Ukraine will escalate into a longer and bigger conflict,” JPM said. “However, we believe Western governments will now give far more thought to the need for ‘defence’ and the risk to defence budgets is now skewed to the upside.”
Jefferies assumed coverage of Rentokil at ‘buy’ on Friday and lifted its price target for the stock to 675.0p from 650.0p as it said recent share price weakness following news of the Terminix deal was a buying opportunity.
It noted that since Rentokil announced the acquisition of US rival Terminix in December, shares had underperformed around 20%, which when adjusted for potential earnings accretion suggested a more than 35% de-rating on a fully synergised view.
“We see this as a buying opportunity,” it said. “We are positive on the deal, believe strategically it makes sense and see significant upside to synergy targets and deal economics, which may be underappreciated by the market.”
It said the deal acquisition was “transformational” for Rentokil and added that “patience will be needed”, with the shares likely to be rangebound in the near term until confidence in deal completion improves.
Analysts at Berenberg raised their target price on real estate investment trust Segro from 1,500.0p to 1,560.0p on Friday, stating the firm was now “justifying its premium rating”.
Berenberg said although a strong performance was expected from Segro, the company’s 2021 results, with a 42.5% total accounting return, were a “knockout”.
The German bank noted that with the firm’s pipeline extended, demand likely to remain elevated, rental growth expectations raised and Segro’s positioning being standout, it remains bullish and continues to think that the stock’s recent share price performance remained “unbefitting of the company’s latent potential”.
“Against this strong demand backdrop, we expect Segro to deliver a further 801,400 square metres of new industrial/logistics space in full-year 2022 at a 57% profit on cost,” said the analysts, who stood by their ‘buy’ rating on the stock.
“With the company 67%-weighted to high-growth urban locations and circa 42% of contracted rent being subject to rent reviews in the next three years, Segro’s near-term rental and capital prospects remain standout.”
