Broker tips: Unilever, Auto Trader, Rainbow Rare Earths

Barclays upgraded Unilever to 'overweight' from 'equalweight' on Thursday and lifted its price target on the stock to 4,600.0p from 4,300.0p, having turned more positive after digesting chief executive Hein Schumacher's strategy update and targets.

"There's much to do and it will take time but new CEO Hein Schumacher comes across as a real operator who understands the challenges," the bank said. "There have been false dawns but we see a path forward and on 16x 24E PE, with expectations tempered, Unilever could finally unlock real value."

Barclays said things might not get better quickly given a weak starting point, with only 38% of the company's global portfolio winning share at present, but the bank expressed confidence that there was urgency and clarity in the new CEO's plans, even if the content of the plan was not new.

"It's early days, but our sense is that Hein Schumacher has the best chance of actually delivering on the promises that long-standing Unilever observers have heard numerous times before," the bank said. "We think there is a line in the sand drawn and to us the risk/reward here looks interesting, especially given there are more drastic Plan B options that could be considered if Plan A doesn’t start delivering relatively quickly."

Barclays said the big difference this time round was that there was no big bang restructuring announcement or upfront spend and this time Unilever was doubling down on just 30 brands that make up 70% of group sales.

"These 30 brands include its 14 billionaire brands as well as other promising brands such as Liquid IV and Nutrafol that could become the billionaire brands of the future," it noted. "Moreover, we think the new five-category organisation is a much more logical way of running a consumer giant like Unilever and optimally allocating resources."

Auto Trader's share price raced ahead on Thursday morning after the automotive online marketplace smashed expectations with its interim results.

First-half revenues jumped 12% year-on-year to £281.0m, well ahead of the £259.0m expected by the market, while earnings per share rose 2% to 14.0p, ahead of the 13.8p expected. However, both Peel Hunt and Shore Capital kept their 'hold' stances on the shares following the results.

Peel Hunt called the performance "robust", highlighting a particularly strong performance of its core business, with trade revenue up 9% and average revenue per retailer rising 12%. The broker said it expects to upgrade its full-year EPS forecasts by 4-5% on the back of the results, saying that while the macro environment remains tough, "Auto Trader continues to sail through". But with the shares trading at 23 times full-year earnings forecasts, Peel Hunt chose to stay at 'hold'.

Shore Capital, meanwhile, said the results "reinforce our view that Auto Trader was a well managed company with a robust business model and a strong commercial and consumer proposition". It also noted that current forecasts indicate a value of 646.0p for the shares, suggesting that the group's share price, which was little changed over a six-month view, "remains in fair value territory".

Analysts at Berenberg lowered their target price on minerals exploration and production company Rainbow Rare Earths from 43.0p to 38.0p on Thursday but stated the group's $50.0m TechMet deal had de-risked its funding case.

Rainbow Rare Earths announced on Wednesday that it has entered into an option agreement with major shareholder TechMet, backed by the US International Development Finance Corporation, whereby TechMet has the right to invest $50.0m for a 15-33% direct equity stake in its Phalaborwa rare earth project in South Africa. This would underpin a valuation of the project's equity at $151.5m-333.3m at the option price.

TechMet also has a put option, granting it the right to exchange the direct project stake for shares in Rainbow at "the fair market value of the underlying Phalaborwa stake" for a period of two years from the commercial completion of the Phalaborwa project, or at any time in the event of a change of control of Rainbow.

"In our view, this is a major de-risking event from a funding perspective and will act as a positive in the eventual construction funding of Phalaborwa. We had previously modelled a final $100.0m equity raise as part of the project construction fundraise, and clearly this will reduce with the TechMet option. Given an NPV in the preliminary economic assessment of $627.0m, we expect a TechMet stake of 15%. Ultimately, this removes some funding overhang for the project's construction cost, and we think will act as a positive for debt lenders also, given that a well-backed investor is willing to invest $50.0m into the project," said Berenberg.

The German bank made some adjustments to its model to incorporate Rainbow's recently released full-year results and to adjust for recent price deck and foreign currency changes, which had a negative impact on its Sterling valuation. Overall, these changes adjust its price target to where it still offers a 140% risk upside. Berenberg also stood by its 'buy' rating on the stock.