Broker tips: Harbour Energy, Knights Group

by | Jul 21, 2023

(Sharecast News) – Berenberg reiterated its ‘hold’ rating on Harbour Energy on Friday, but warned of potential downside to the current share price.
In a note on the oil and gas sector, the bank trimmed its price target for the UK’s largest North Sea oil and gas producer to 240p from 290p.

It said: “We see small downside to the current price on our valuation.

“In our view, the main challenge for the company remains the relatively short reserve life in the portfolio and uncertainty over delivery of contingent resources given the industry’s limited appetite for investment in the UK.

“Although current production delivers attractive free cash flow metrics in the short term, this declines quickly and may be channelled into the well-flagged need to buy a material production base in a jurisdiction outside the UK.”

Harbour Energy is looking to diversify overseas after the UK government imposed a windfall tax on British oil and gas producers, hitting profits.

Berenberg continued: “The key problem for operators in the UK is constantly evolving tax environment, making long-term planning difficult.

“At present, the Energy Profits Levy is at 35%, taking the marginal rate to 75%, although this is expected to end in 2028. There is a concern that a new government could extend the level indefinitely.”

Analysts at ShoreCap upgraded their recommendation for legal and professional services business Knights Group from ‘hold’ to ‘buy’.

In particular, they noted how the company’s latest full-year results had revealed several tailwinds, including “strong” interest earnings from client monies, a softer recruitment market, inflation-beating rate rises and a better acquisition policy.

As a result, their outer year estimates were raised by 4%, which in turn also saw their ‘fair value’ rise from 105.0p to 115.0p.

“Knights is currently trading on an FY25F PER of 3.6x, an EV/EBITDA multiple of 2.4x and a dividend yield of 5.8%,” they said in a research note sent to clients.

“Although there are risks relating to the acquisition policy, we are slowly warming to the strategy as long as it remains selective and manageable.”

They also believed that a return to organic growth was “likely” in the 2024 financial year, adding that the shares’ current discount was not warranted.

In their view, the shares should be trading on a price-to-earnings multiple of 5.2, instead of the current 3.6.

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