The Expert View: BP, BBA Aviation and Direct Line

Our daily round-up of analyst recommendations and commentary, featuring BP, BBA Aviation, Direct Line, Babcock and Redrow.

Key stats
Market capitalisation	£83,157m
No. of shares out	19,054m
No. of shares floating	18,985m
No. of common shareholders	not stated
No. of employees	83400
Trading volume (10 day avg.)	26m
Turnover	241,493m USD
Profit before tax	16,058m USD
Earnings per share	0.84 USD
Cashflow per share	1.25 USD
Cash per share	0.48 USD

*Correct as at 23 Oct 2012

RBC lifts BP's target price on TNK-BP deal

Peter Hutton, analyst at RBC Capital Markets, has increased his target price for BP (BP.L) after it agreed to sell its stake in TNK-BP to Rosneft, partly in exchange for a share of the Russian state-owned energy company.

The market hasn't reacted favourably to the deal so far, with the shares dropping about 2% following the announcement on Monday. However, Hutton praised the pragmatism of the deal, saying it was the best option available.

'As a stand-alone investment, we recognise that BP has better alternatives to invest the $14.5 billion than 19.75% in Rosneft,' he acknowledged. 'But this misses a vital point — the political reality was that this level of cash was never likely to be available for BP to invest outside Russia, and therefore the question is whether this is the best available alternative for investment inside Russia in the interim.'

The proposed deal sees Hutton's target price rise from 510p to 530p, and he reiterated his 'outperform' recommendation, although he cautions that the shares are 'above average risk'.

Analysts at Canaccord struck a similar tone following the deal, saying 'although it will involve earnings and cash flow dilution, this is outweighed by a significant reduction in risk'. They maintain a 'buy' recommendation on the shares.

Shares in the group closed at 433.17p on Tuesday, down 10.28p or 2.32%.

Key stats
Market capitalisation	£1,004m
No. of shares out	480m
No. of shares floating	477m
No. of common shareholders	not stated
No. of employees	10415
Trading volume (10 day avg.)	1m
Turnover	1,335m USD
Profit before tax	95m USD
Earnings per share	0.20 USD
Cashflow per share	0.29 USD
Cash per share	0.16 USD

*Correct as at 23 Oct 2012

Westhouse downgrades BBA Aviation to 'neutral'

Kevin Fogarty, analyst at Westhouse, has downgraded aviation services firm BBA Aviation (BBA.L) from 'buy' to 'neutral' following the recent surge in the share price.

Since the interim results were released at the beginning of August the shares have risen 15%, Fogarty noted, eroding most of the upside potential of his 220p target price.

Fogarty's decision to downgrade follows a meeting with finance director Mark Hoad on Monday, which presumably left him with no information significant enough to change his forecasts.

Wider market conditions also don't offer any big incentive to revise trading estimates, with US Federal Aviation Administration business jet flying activity flat on a rolling 12-month basis.

'On a medium term view BBA continues to offer exposure to structural growth potential, with North America flying activity remaining an estimated 21% below peak levels,' Fogarty said. 'However, with the near-term cyclical upside being less certain, and being cognisant of the risks to cyclical growth, we move our recommendation from buy to neutral.'

BBA features in the top holdings of Citywire A-rated Christopher Murphy's RBS Growth fund.

Shares in the group closed at 208.6p on Tuesday, down 1.4p or 0.67%.

Key stats
Market capitalisation	£2,848m
No. of shares out	1,500m
No. of shares floating	450m
No. of common shareholders	not stated
No. of employees	15309
Trading volume (10 day avg.)	38m
Turnover	£4,775m
Profit before tax	£249m
Earnings per share	16.60p
Cashflow per share	18.70p
Cash per share	91.99p

*Correct as at 23 Oct 2012

Nomura says 'reduce' Direct Line

Fahad Changazi, analyst at Nomura, has initiated coverage of recently spun off car insurance firm Direct Line (DLG.L) with a 'reduce' recommendation, saying the current share price looks rich.

The analyst praised the enthusiasm of the new management team, and he said there's plenty of scope for them to streamline the group's operations. He also said the outlook for dividends is positive given the high operating coverage ratio of about two times.

However, he said the shares still look expensive, and it's too early to know how much money can be saved by restructuring.

'We believe these positives are, to an extent, already reflected in the share price,' he said. 'In addition, in our view, to gain full realisation of the restructuring potential, we believe data points of performance are required. Hence, we believe in the short term, as we head into full-year results, that there is better relative value in Admiral and RSA.'

Shares in the group closed at 189.75p on Tuesday, down 3.25p or 1.68%.

Key stats
Market capitalisation	£3,424m
No. of shares out	360m
No. of shares floating	354m
No. of common shareholders	not stated
No. of employees	25325
Trading volume (10 day avg.)	1m
Turnover	£2,848m
Profit before tax	£154m
Earnings per share	42.76p
Cashflow per share	75.61p
Cash per share	28.87p

*Correct as at 23 Oct 2012

JP Morgan raises Babcock's target price

Robert Plant, analyst at JP Morgan, has increased his target price for engineering support services business Babcock International (BAB.L), saying first-half results due in a fortnight's time should show continued progress on trading.

Plant said Babcock is his preferred stock in the sector as it offers the most upside potential (35% earnings per share upside to March 2015 in his best-case scenario) and is at the cheaper end of the sector valuation range with a 2013 price-to-earnings ratio of 12.7x, the same as Capita and Serco.

He also noted that Babcock has seen the fastest rise in its pipeline of work among the three big public sector outsourcing companies, rising from £3.4 billion in 2010 to the current £13 billion.

'This in turn has spurred an acceleration in organic revenue growth from no growth in 2010 to 6% in 2012,' he said. 'The pipeline should be a leading indicator for organic revenue growth and we think the increase bodes well for a further acceleration in organic revenue growth.'

Plant's target price rises from 990p to 1,050p.

Babcock features in the top holdings of Citywire AAA-rated Julie Dean's Cazenove UK Opportunities fund.

Shares in the group closed at 951.5p on Tuesday, down 6.5p or 0.68%.

Key stats
Market capitalisation	£563m
No. of shares out	370m
No. of shares floating	214m
No. of common shareholders	not stated
No. of employees	967
Trading volume (10 day avg.)	1m
Turnover	£479m
Profit before tax	£30m
Earnings per share	9.67p
Cashflow per share	10.09p
Cash per share	10.11p

*Correct as at 23 Oct 2012

UBS downgrades Redrow on share price gains

Benjamin Rosenberger, analyst at UBS, has downgraded homebuilder Redrow (RDW.L) from 'buy' to 'neutral' based on the rise in the share price over the past few months.

The analyst said improving margins, rising market share and exposure to the resilient London property market will all support growth over the coming years. However, he said the shares now reflect this upside.

'While we see Redrow as an attractive recovery and transformation story, we believe the share price now reflects the long term potential and the associated execution risks,' he said.

Furthermore, he pointed to rising debt as a result of ongoing investment, possible delays to projects caused by planning hurdles, and the inherent risks that accompany high-rise construction in London as factors to keep in mind.

Rosenberger has a 170p price target for the shares, up from 160p previously.

Shares in the group closed at 153.9p on Tuesday, down 1.3p or 0.84%.