Broker tips: ABF, Dixons Carphone, RSA Insurance

Associated British Foods was under the cosh on Wednesday after Morgan Stanley cut its stance on the stock to ‘equalweight’ from ‘overweight’ and slashed the price target to 2,650p from 3,500p as it took a fresh look at Primark.

The bank said that while Primark remains a great business with attractive long-term growth prospects, its like-for-like sales have slowed to zero over the last 18 months or so.

“With Kantar data suggesting that trading momentum in the UK has weakened further recently, we now expect -1% LfL for FY H2.This means we now expect LFL to be negative for the year as a whole– something that we have not seen from Primark in more than 15 years.”

MS said that it was not sure why LFL growth was slowing so much but is concerned it could be partly due to structural factors.

HSBC initiated coverage of Dixons Carphone at ‘buy’ with a 460p price target, saying it is well-place and well-run, with growth underpinned.

The bank said Dixons’ core prospects are supported by a robust strategic position, solid consumer backdrop and a business well-suited to prevailing industry trends.

Dixons Carphone has recalibrated its business model amid competition from low-cost pure-play online operators and changing industry trends.

It now prices off Amazon but uses service to differentiate, aiming to sell higher-value product and higher-margin accessories to compensate for a higher cost model, the bank explained.

Barclays said it sees 15% upside at RSA Insurance after an encouraging meeting with some of the company's management, reiterating its 'overweight' rating.

RSA's chief financial officer Scott Egan repeated the recent mantra that, while it is early days on the roadmap to its 2018 targets, the company is on track and is "focused intently on executing".

Management's ambition is to achieve a combined ratio (COR) of less than 94% in UK, akin to Aviva UK at 93.5%, less than 94% in Canada and less than 85% in Scandinavia, which equates to group combined ratio of circa 91%.

"The plan was not predicated on any changes in the company’s underlying markets, but purely on self help levers within their control. If they do not achieve the targets, management will be held accountable," Barclays relayed.

The bank upgraded RSA last month on the thesis that even if the insurer is able to partially achieve its 2018 ambitions, the stock offered significant upside to potentially become one of the highest yielder within FTSE 100 beyond 2018.

"The CFO suggested that all the markets they operate in could see a growth in line with local GDP at the most.