Broker tips: BT Group, Aviva, Arrow Exploration

(Sharecast News) - Analysts at Berenberg downgraded telecommunications giant BT Group from 'buy' to 'hold' on Tuesday, citing a "corridor of concerns". Berenberg said it has long acknowledged political risks to BT's CPI+3.9% pricing mechanism at the next UK general election, plus the longer-term threat to Openreach from alternative fibre networks.

However, in the near term, the analysts previously thought that investor sentiment towards BT would improve in 2022-23 from a return to growth and achievement of its £7.9bn underlying earnings target.

"We underestimated the pressures on BT's business-facing divisions, and the Q1 results raised a multitude of questions about BT's investment case," said Berenberg, which also lowered its target price on the stock from 220.0p to 190.0p.

The German bank added that it worries that by the time the above concerns can be resolved that it will then be approaching the general election, at which point the pricing and Openreach debates will "increasingly" take over.

"BT trades on 16x EV/OpFCF and 5% normalised EFCF yield for 2023/24E, versus telecoms incumbents on 15x and 7% respectively. However, on metrics that smooth out investment, like P/E, BT looks cheaper, on 8x P/E (sector: 12x)," concluded Berenberg.

RBC Capital Markets lifted its price target on Aviva to 510.0p from 420.0p on Tuesday, citing "strong capital generation".

The Canadian bank stated that given Aviva's strong capital generation, it now expects that the firm can balance enhanced shareholder returns and reinvestment into growth - an area that it noted has historically been "a key concern" for investors.

"Our analysis of Aviva's balance sheet indicates that not only can Aviva undertake buybacks of up to £450m per annum, it can generate growth to support a long-term dividend per share compound annual growth rate of 4% per annum," said RBC.

RBC, which reiterated its 'outperform' rating on the shares, said this results in Aviva offering a sector-leading cumulative total capital return yield of 33% over 2022E-24E.

"Despite this, Aviva's dividend yield is 14% higher than its historical average," it added.

Analysts at Canaccord Genuity initiated coverage on exploration and production firm Arrow Exploration at 'buy' on Tuesday, stating the group was "targeting the bullseye".

Canaccord Genuity said Arrow has had "a busy operational programme", providing multiple varied market catalysts, with its near-term focus on the Tapir licence, of which it has a 50% working interest, in the "prolific" LLanos Basin of northeast Colombia.

The Canadian bank noted that in 2022, Arrow had already drilled two successful development wells on the Rio Cravo Este field on Tapir, which more than tripled total company production to around 1,500 barrels of oil per day, and through further drilling the company was now on track to deliver its target production level 3,000 bopd by spring 2023.

However, Canaccord still sees "considerable further growth potential" from the group's current assets - RCE field, nearby low-risk Carrizales Norte prospect, plus other Tapir exploration targets, and the Oso Pardo field extension on Santa Isabel licence.

"We see potential to increase production to over 6,000 bopd," added the analysts, who started the stock off with a 36.0p target price and said it was in "a good place" for longer-term growth.