Broker tips: AMEC, BHP Billiton, Supergroup

LONDON (ShareCast) - The oil services sector has performed well recently on the back of the sharper-than-expected rebound in oil prices, but more is needed for the sector to achieve a fundamental improvement in its pricing power versus exploration and production customers, analysts at Exane BNP believe. Indeed, companies in the space have moved closer to capitulation - accepting that "difficult conditions" are here to stay - and progress has been made on the capacity-cut front. As well, the short-term demand/supply outlook for oil has improved.

Nonetheless, in a research note e-mailed to clients the broker stresses that the entire cost curve is seeing a reduction, and hence the relative position of offshore developments has not yet improved - even if further gains in the oil price could see stocks move higher.

In the case of offshore contractors, the analysts are concerned by the fact that reworking/efficiency can lead to deflation and hence lower revenues in the medium-term.

However, "in seismic, we see the first steps towards recovery in a world where exploration is still needed for new discoveries, but headwinds remain significant," the broker wrote in a research note e-mailed to clients.

Aker (Other OTC: AKAAF - news) remains a favoured name in the oil services patch while Seadrill (Munich: S9A.MU - news) and Saipem (Other OTC: SAPMY - news) are their least preferred names. They like Wood Group "but see near-term uncertainties on shale and the shares have been strong versus the sector." Lastly, Exane BNP has moved to upgrade AMEC to neutral from underperform.

BHP Billiton (NYSE: BBL - news) 's third quarter results revealed the weak performance of assets that the mining group will be spinning off into its South32 business, said Investec (LSE: INVP.L - news) .

The demerger, which will include a collection of aluminium, coal, nickel, manganese, silver, lead and zinc assets, will cost the company $641m after tax, plus $60m a year for South32 to set itself up for independent life.

Investec said the weakness of the assets in the third quarter results were hidden by the overall good performance of BHP with iron ore production up 20% year-over-year to 58.98m tonnes.

"With shareholder approval of the spin-off due in just over a week, such relative performance has important ramifications for the NewCo, as shareholders in South32 could see, in our view, weaker multiples and therefore potential erosion of shareholder value. This could play into the hands of an acquirer," said analysts Hunter Hillcoat, Marc Elliot and Jeremy Wrathall.

The broker gave the company a 'sell' rating and target price of 1,329p.

Berenberg has chosen Supergroup (LSE: SGP.L - news) as its top pick in the retail sector as the SuperDry street fashion label moves from being "a business with significant potential to one which is starting to deliver".

With a 'buy' recommendation and a 1,160p price target, a 17% premium to the share price, the German bank said time spent "on the road with the company" had persuaded it of the upside potential from both the significant self-help opportunities in the business and from the North America expansion.

Berenberg believes the company's volatile performance history since its March 2010 IPO, perceived execution risk and comparison with US peer Abercrombie & Fitch (NYSE: ANF - news) (ANF) due to the pair's one-brand strategy have overshadowed the stock.

"However, the recent strengthening of management will reduce volatility in our view, while we believe there are key differences between the SGP and ANF business models." New (KOSDAQ: 160550.KQ - news) chief executive Euan Sutherland has added a longer-term strategic focus and is strengthening the business operationally in Berenberg's view, with simple improvements such as a move to a single stock pool, direct sourcing and greater integration between retail, wholesale and e-commerce that together "provide the foundations to take the business to the next level".

These changes, analyst Michelle Wilson believes, should leverage the current cost base to drive like-for-like growth and significantly reduce the execution risk of international expansion.

Wilson (Oslo: WILS.OL - news) said she also believes management guidance of a full year 2016 loss and a 2017 breakeven on the rejigged North American business "could be conservative" due to the significant near-term revenue potential from wholesale and e-commerce sales channels.

Investor (Stockholm: INVE-A.ST - news) concerns about execution risk are being swept aside by Sutherland's decisive actions since appointment late last year and his former experience as COO of Kingfisher (LSE: KGF.L - news) .

A significant differences between Supergroup's business model and that of ANF, the analyst argued, is that the UK company's principle that every individual store must be profitable.

Moreover: "ANF's struggles have been well documented and it seems that some investors believe SGP will ultimately follow the same path. However, we believe a lot of ANF's downfall has been self-inflicted." Finally, on valuation, Berenberg noted that Supergroup share currently trade at an 8% discount to the sector versus a historical 8% premium.