Broker tips: Halfords, Kingfisher, Rio Tinto, Hikma Pharmaceuticals
(ShareCast News) - With the retail sector's risk profile increasing as the UK discretionary consumer outlook deteriorates, HSBC downgraded and cut the target prices for Dunelm and Halfords, but upgraded Kingfisher to 'buy' due to its transformation plans.
HSBC has taken a more cautious view of retail due to a backdrop of increasing macroeconomic risk, as the strong data post the Brexit referendum has begun to be riven by cracks.
Not only have inflationary headwinds become increasingly obvious, demonstrated by Tuesday's CPI of 2.7%, but consumers' budgets are being squeezed as real wage growth has turned negative, creating increasing threats to demand for retailers.
"In addition, inflation in inelastic areas such as food is accelerating, which will further squeeze discretionary demand," the bank's analysts said.
"The situation is made worse for non-food retailers as cost inflation is feeding through as hedging programmes roll off."
This suggested the second half of the year will see non-food retailers face a period of falling demand and rising costs - "a toxic combination".
RBC Capital Markets has upgraded Rio Tinto to 'top pick' from 'outperform', saying the stock is as inexpensive as it's been over the past five years following the recent pullback.
"We believe the market is taking too negative a view on the medium-term iron ore market, and this is obscuring a growing, low cost, high free cash flow story," RBC said, adding that Rio's low-cost operations, strong balance sheet, and potential for increased cash returns should see the market tighten the valuation over the coming months.
The Canadian bank pointed to a sustained recovery in iron ore prices as a possible catalyst for the stock. It argued that if prices rise or remain at current levels, there is a big change for consensus earnings upgrades and a further re-rating alongside a reduction in balance sheet risk. It also argued that Rio's valuation is likely to improve once general sentiment around China improves.
However, if iron ore prices were to fall, this would hit Rio as the concentration in cash flow generation in iron ore leaves the company exposed to falling prices.
Hikma Pharmaceuticals was under pressure on Wednesday as Jefferies downgraded the stock to 'underperform' from 'buy' and slashed the price target to 1,450p from 2,162p.
Jefferies pointed to delays to the US Food and Drug Administration's approval of its generic Advair Diskus asthma treatment. It said that while Hikma hasn't completely ruled out approval this year, this is unlikely.
"We believe the delay could be until 2H 2018 at the earliest assuming three months to get an FDA meeting, six months to put together a resubmission package and six months for a class 2 review; however if another trial is needed we estimate it could add six to nine months." Hikma could provide further details at the first-quarter update this week, but Jefferies reckons there will be a "sizeable consensus downgrade" with any updated guidance.
In addition, the bank said the delay limits the commercial potential before other entrants potentially enter the market.
"Although Hikma stated at FY that it expects to launch five new products by end June, we would like to see sales pick up before potentially turning more constructive," it said.