Broker tips: Boohoo, WPP, Hill & Smith, Rio Tinto

Shore Capital downgraded Boohoo to 'sell' and said the company's share price did not reflect the risks created by allegations of mistreatment of workers in its supply chain.

Boohoo announced an independent review of its supply chain on Wednesday and said it had cut ties to two factories that breached its code of conduct. It said it found no evidence of workers being paid less than half the UK minimum wage, as alleged in a press report.

Boohoo has also begun recruiting two new non-executive directors and pledged to spend £10m to clean up supply chains in Leicester, where the allegations are based.

"All these measures look sensible at first glance, but the genie is already out of the bottle and the company will need to be more transparent on sustainability and sourcing issues," Shore analysts Greg Lawless and Clive Black said in a note to clients.

Shore, a broker to Boohoo, said the company's share price implied no economic impact from the supplier issues in Leicester. Lawless and Black listed potential customer boycotts, higher manufacturing costs and increased operating costs to demonstrate compliance as possible effects.

Also, the company may be subject to external inquiries, including a possible police investigation, making the outcome of the matter hard to judge, the Shore analysts said. Boohoo shares may also be off-limits for ethical funds, they added.

"With a premium rating and major issues around brand equity, trading and financial fall-out, we think it wise to move to sell," said Shore Capital, which has a 261p target price on the firm.

WPP slumped on Wednesday after Credit Suisse reinstated coverage of shares in the advertising company at ‘underperform’ with a 565p price target, pointing to "rising industry disruption".

The bank said its analysis of the marketing industry suggests clients are shifting spend more rapidly to digital transformation at a time when agencies still have at least 70% of their revenues from traditional services.

"Creative fee pressure, progressive in-housing of creative, production and media, competition in digital transformation from consultancies and new marketing technology (martech) firms remain the key challenges," it said.

Credit Suisse cut its 2020/21 earnings per share estimates by 43%/32% from pre-Covid-19 levels to 53.7p/69.3p. It also said it is around 5% below company-compiled consensus for 2021 and 11% below for 2022.

Analysts at Berenberg hiked their target price on construction products supplier Hill & Smith from 1,325.0p to 1,420.0p on Wednesday, stating the group offered investors three "attractive characteristics".

In particular, Berenberg highlighted how near-term trading was "resilient" considering recent market volatility stemming from the Covid-19 pandemic, with organic sales up by 4.8% in the first quarter, before the outbreak and associated lockdowns drove a 26% reduction in sales across April and May.

The analysts stated that H&S's road safety products business was "relatively unaffected" during the period and while acknowledging its US operations were weaker, the firm benefited from its 'critical business status' - allowing facilities to remain open throughout the second quarter. However, the German bank did note H&S's security products, pipe supports and UK/French galvanising operations had been more negatively affected.

The broker also pointed to a "gradually improving outlook" for H&S, stating the company appeared to be "through the worst of the downturn" - with all facilities back open, activity levels improving in key regions and May trading modestly ahead of April.

Finally, the analysts saw some "attractive" longer-term drivers for H&S, stating that even before the Covid-19 pandemic, the outlook for infrastructure spending was encouraging, particularly on UK roads projects.

RBC Capital Markets upgraded its stance on shares of miner Rio Tinto to ‘sector perform’ from ‘underperform’ on Wednesday, hiking the price target to 4,200p from 3,600p.

The bank said it continues to prefer other exposures in Anglo American and BHP, but has upgraded the stock following its mean-reverting underperformance versus the FTSE 350 mining index and in light of its attractive dividend yield.

"With a more balanced view on iron ore markets and slower decline in price forecasts, we see little impetus to sell with positive macro tailwinds and sector valuation dynamics, combined with an attractive 2020 dividend yield," it said.

"We continue to take a cautious view of the longer-term outlook for iron ore, but for now we expect Rio shares to show resilience."

RBC noted that it has written at length on the structural medium-term challenges facing iron ore markets, to which Rio is overweight in exposure.

"However, recent Chinese stimulus has rapidly driven steel production to record levels as policymaker reality takes charge," it said. "Higher Chinese demand has placed iron ore into a more balanced market than our previously too conservative forecasts suggested."