BP remains at the top of our UK charts

May 6 2008 by Peter McCusker, The Journal

BP’s shares continue to be rated as Outperform relative to the sector with a fair-value estimate of 670p. The stock ranks in the top quintiles of our Dividend Discount Model on both a global and regional basis.

BP remains our preferred UK major oil company over the medium term, despite the short-term operational problems, owing to the group’s relatively attractive fundamentals and value creation strategy.

The group has high quality upstream assets, good conventional fundamentals (high-margin oil and gas production growth – GoM, West Africa and Azerbaijan) and a favourable capital management programme (enhanced dividend payments and significant share buybacks). The shares continue to look good value on a 2008 PER of around 9x and dividend yield of 3.9%.

Prudential – Prudential is our preferred play in the UK Life Insurance sector, and accordingly we retain our outperform recommendation.

The unique Asian franchise remains the attraction, where we expect the very strong growth to continue.

Management has recently announced new Asian business targets will be met one year early, and guidance provided at the recent Asia investor day reiterated their positive outlook.

In the US, management have flagged that VA sales will slow on account of the volatile markets, but the upward sloping yield curve and higher credit spread point towards strong fixed annuity sales.

In the UK, growth will remain subdued, following the group’s exit from a number of product lines, but the group’s strong positioning in with-profits products should make it a strong contender to win any contracts which come onto the market. With group cash flow improving, we expect that dividend upgrades could be on the cards.

Prudential trades approximately in line with its peers, on an undemanding PE multiple of just 8.3 times, despite the longer term promise of the Asian operations.

We expect investors to increasingly view Prudential as a cheap Asian play, versus an average European one. Prudential remains a perennial takeover target, but the management preference for the independent route would complicate any approach.

Reed Elsevier -– Reed Elsevier has a high quality defensive business model which is likely to outperform when economic growth is slower and, following a fall in its share price, its valuation looks more attractive.

We are upgrading our recommendation to a Buy. Reed is solid, with the group expecting each of its divisions to produce revenue growth of over 5% per annum for the next few years, which should translate into above average earnings growth.

Andrew Miller, Regional Centre Head – Barclays Wealth