In a quiet start, leading shares are moving higher again, with BP leading the way despite Tony Hayward facing the anger of the US Congress yesterday over the Gulf of Mexico disaster.
The company is set to sell assets as part of its $20bn commitment to funding the clean up costs but said today it had no plans to sell its stake in Russia's Rosneft. But with uncertainty as to whether $20bn will really be enough to cope with the fallout from the oil spillage, analysts have been busy cutting their price targets on the company. Deutsche Bank has cut from 720p to 480p, Goldman Sachs from 600p to 580p and HSBC from 660p to 500p. However, with fears that the company may not even survive receeding somewhat, these targets are well above the current share price, even with today's rise so far to 374.05p, up 14.35p.
The FTSE 100 is currently 28.62 points higher at 5282.51, ahead of UK public sector borrowing figures due shortly, with analysts expecting a figure north of £18bn. Joel Kruger, currency strategist at DailyFX, said:
The recovery rally continues into the final day of trade for the week, highlighted by an impressive rebound in euro/dollar. The flow of funds back into the euro reflects a pickup in the broader global macro risk sentiment, with equity and commodity prices also finding similar bids.
However, technical studies still only suggest that the latest price action is only corrective in nature, and a resumption of the underlying trend of a stronger dollar, lower equities, and lower oil prices, should not be discounted. The shift in the fundamental outlook seems to be driven more on a lack of bad news than any real significant wave of good news, which surely does not bode well for a sustained recovery.
Aviva has added 7.2p to 355.4p after JP Morgan upgraded to overweight and hiked its price target from 285p to 509p. It said:
Aviva is currently yielding 7.3% compared to 4.9% at Legal & General and 3.7% at Prudential. We believe that the capital structure and asset risk in these three groups is broadly similar, but that Aviva's capital generation versus dividend distribution has been inferior in recent years. However, we see this also improving and the consequence is that we expect the dividend yield differential to narrow.
We believe that investors will get more confidence on this as the company improves its disclosure. Management has already taken an important step forward with the £1.3bn operational cash target for 2010. We think that there is more to go here, with the next catalyst in this respect being an investor seminar on July 2.
We welcome the shift in financial focus from long-term aspirational goals to short-term deliverables (i.e. the £1.3bn cash). This indicates to us a significantly reduced M&A appetite which we view positively as Aviva has been the most acquisitive European insurer since 2005 and this is not something that gets rewarded by the market in this sector.
Elsewhere BT fell 2.6p to 137p as strike action grew closer, while downgrades from UBS hit Capita, down 15p to 784.5p, and Serco, off 4.5p at 623.5p. In a note on European outsourcing, UBS said:
While we fully expect revenue growth to continue, our detailed analysis of the drivers suggests the 10% organic growth rates that have traditionally driven strong earnings (and share price) performance look increasingly hard to achieve, given the significant increase in contract win rate that would be required.
We do see long-term growth opportunities from the large and fragmented nature of global outsourcing markets, and believe the weak UK fiscal position should benefit outsourcing companies in time. However, we see few imminent contract awards, and are wary of the lack of visibility, lengthy bid cycles, pricing pressure and competition.
We prefer Serco over Capita. Our business model analysis suggests Serco has fundamentally larger addressable markets (front-line versus back-office services, centrally controlled expenditure and its international presence). In our view, Serco also has better current visibility and trading momentum, is a purer play on government outsourcing, and has limited private sector exposure.
For both Capita and Serco, we see good growth and much good news priced in at current levels. We downgrade Serco to neutral from buy (price target cut to 650p from 680p), and Capita to sell from neutral (price target 750p).
