FILE: Oil drums containing lubricant oil sit on a conveyor belt as they are prepared for shipping at the Royal Dutch Shell Plc lubricants blending plant in Torzhok, Russia, on Wednesday, Feb. 7, 2018. All eyes are on this weekend’s G-20 summit in Argentina, where Russia’s Vladimir Putin and Saudi Arabia’s Mohammed bin Salman are likely to discuss how to coordinate oil policy. The nations are in talks over the timing of any reduction in supply, Reuters reported Thursday, a week before producers are due to meet in Vienna to discuss the market and a possible cut in 2019. Photographer: Andrey Rudakov/Bloomberg
© Bloomberg

Thursday 14:00 BST

What’s happening

IMI slipped after the engineer said organic sales growth weakened 2 per cent year on year in the first quarter due to a sharp decline at its critical engineering division, which sells valves and seals to the power and oil industries. Management said critical product order intake was strong and, in spite of mixed trading conditions across the group, full-year results should meet market expectations.

Precision engineering was the bigger concern for analysts, with IMI tempering divisional guidance on sales growth and margins. “A weaker precision outlook in an already pretty flat trading outlook for 2019 highlights the issues” faced by new chief executive Roy Twite, said RBC.

Barratt Developments climbed after the housebuilder said in a 10-month update that full-year results should be modestly ahead of previous expectations.

“The key driver of the beat is margin growth, driven by self-help initiatives, with house price inflation broadly offsetting cost inflation. We think that these trends will continue over the next few years, which should lead to good earnings growth in the context of the sector and support returns at a time when others are seeing some moderation.”

Numis Securities

Leonardo of Italy, formerly known as Finmeccanica, led the Stoxx 600 gainers on better than expected first-quarter results. The defence engineer posted 16.4 per cent order growth thanks to a pick-up in demand for helicopters and electronics, as well as a spike in orders for detection systems. Management saw sales growth levelling off in the rest of the year but remained “comfortable” with guidance.

“The first is seasonally the weakest quarter, so it is difficult to extract a trend. However, the emphasis on the analyst call was very much ‘a good start’,” said Citigroup.

Etsy was under pressure in US premarket trading after cautioning that marketing investment would hold back current-quarter margins. The crafts website reported a solid start to the year, with first-quarter gross merchandise sales above expectations in spite of weakness in January-February, but hopes of a significant upgrade to full-year guidance proved misplaced.

“Investors are looking for a path to continued acceleration of gross merchandise sales growth and may not be seeing it here with year-on-year comparisons getting increasingly difficult, a challenging scenario for shares trading at a premium,” said Wedbush. It kept a “neutral” recommendation and $60 target on Etsy, equivalent to 62 times 2019 expected earnings per share.

The Stars Group surged after the PokerStars owner announced a sports wagering partnership with Fox Sports, the first of its kind between a national US broadcaster and a bookmaker.

The companies said they planned to roll out a Fox Bet portal in states that allowed sports betting, in a similar format to its 2018 UK acquisition Skybet, as well as offering a free-to-play game nationwide involving cash prizes. Fox agreed to invest $236m in TSG for a 5 per cent stake, as well as taking an option to buy up to 50 per cent of the company’s US business in 10 years.

“TSG is effectively looking to replicate the success of the SkyBet deal in a far bigger market,” said Barclays.

“TSG has secured a well-known brand to leverage across the whole of the US. Fox gains access to a new, fast growing revenue stream and creates greater diversification. Taking a long-term view, we think the winners in the US sports betting industry will be the companies with national, well known brands that are able to leverage a customer base with a keen interest in sports. So akin to Paddy Power Betfair’s deal with FanDuel, TSG’s deal with Fox makes sense . . . However, the short history of the US sports betting market suggests that after an initial share price spike as the market gets excited about a deal, earnings downgrades are typically met with share price underperformance in the short term.”

Barclays

Sellside stories

● Goldman Sachs repeated “neutral” advice on William Hill and Paddy Power Betfair in research that cut forecasts across the bookmaking sector by about 15 per cent. The broker also set a 190p target on William Hill, down from 270p previously.

“The industry has entered a new reality where multiples will be fundamentally lower, amid persisting regulatory uncertainty and maturing levels of growth,” said Goldman. It argued that bookmaker valuation multiples between 2015 and 2018 were higher than historic levels thanks to online growth, material sector consolidation and a stable regulatory environment in mature markets. However, paced on precedent the current growth outlook was likely to attract a valuation of no more than 10 times earnings, it said.

“We are seeing a rising regulatory burden on the industry, which we believe is here to stay and, combined with greater market maturity, will lead to a normalisation of the growth outlook for the sector,” Goldman said. “Moreover, with growing focus on ESG [environmental, social and governance] integration, we think online gaming companies’ multiple could remain depressed, even if growth opportunities arise, unless they are able to more clearly demonstrate to investors that they are actively engaging with key ESG issues facing the sector.”

● Morgan Stanley upgraded Royal Dutch Shell to “equal-weight” from “underweight” ahead of the oil group’s investor day scheduled for June 4. It said to expect an increase to Shell’s already “outsized” dividend.

Shell should struggle to sustain a $15bn-plus annual dividend cost while investing only $25bn of capital, which was low versus peers, said Morgan Stanley. It expected management to raise the 2020 capital expenditure budget to about $30bn. However, oil companies tend to be punished if they increase capital expenditure without also raising the dividend and most of Shell’s peers had increased their payouts since 2014, the broker said. Shell’s five years without dividend growth had made it an “outlier within its industry”.

“We still see better prospects for dividend growth and dividend cover-by-free cash flow at other majors, including BP and Total. However, we believe Shell is unlikely to underperform in coming months if expectations for a dividend hike start building.”

Morgan Stanley

● In brief: Adecco raised to “neutral” at Credit Suisse; Aggreko rated new “sell” at Investec; Aker BP upgraded to “hold” at Société Générale; Aurubis raised to “neutral” at Goldman Sachs; Balder cut to “hold” at Kepler Cheuvreux; Banca Generali cut to “hold” at Kepler Cheuvreux; Banco BPM cut to “reduce” at Kepler Cheuvreux; Bechtle rated new “buy” at HSBC; Cancom rated new “buy” at HSBC; DWS cut to “hold” at HSBC; Datagroup rated new “buy” at HSBC; Diversified Gas & Oil rated new “buy” at Cenkos Securities; Gama Aviation raised to “hold” at Jefferies; Norsk Hydro raised to “neutral” at Goldman Sachs; Ontex downgraded to “hold” at Deutsche Bank; ProSieben upgraded to “hold” at Liberum; UBI Banca cut to “hold” at Kepler Cheuvreux; Unibail cut to “underweight” at Morgan Stanley.

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