Broker tips: Anglo American, Kaz, Barclays, Ocado

Barclays upgraded Anglo American to ‘equalweight’ from ‘underweight’ and lifted the price target to 845p from 550p on strong valuation support and solid earnings momentum, particularly from the recent rally in coking coal which leaves the balance sheet in a much better position than the bank had expected.

“Had it not been for our cautious outlook on the diamond and platinum group metals markets, and continued labour/political uncertainty in South Africa, we would have been more positive on the investment case,” Barclays said.

It said management remains intent on shrinking the business to its core commodities of diamonds, copper and platinum, which it thinks has some merit given these divisions’ assets are tier 1 and competitively positioned on its commodity cost curves.

“However, with the balance sheet now in a much better shape, it will be interesting to see any further change in tone around ‘value leakage’ as witnessed at the interim results, and as such could see the process of further assets sales slowed/delayed.”

The bank also upped Kaz Minerals to ‘equalweight’ from ‘underweight’, raising the target to 210p from 130p. It said the company has averted more material downside scenarios for equity holders through a combination of strong cost control, so far smooth ramp-up of the Bozshakol and Aktogay projects, and a copper price that has that has allowed it to avoid needing to access debt or equity markets.

“We are constrained from becoming more positive, however, on the grounds that Kaz is trading at parity on EV/EBITDA to Antofagasta on our base case forecasts in 2017-18 with the projects no longer capitalised, while free cash flow yields remain negative; the same is true on spot.”

Barclays upgraded South32 to ‘overweight’ from ‘equalweight’ and upped the price target to 160p from 80p. It said that despite mark-to-market earnings before interest, tax, depreciation and amortisation having risen almost fourfold from the December lows, the investment case remains attractive.

“This is because it passes the basic tests of having a good weighting of tier 1 assets, a management team that has is focused on and executing a simple strategy for value creation, a very robust balance sheet and extremely cheap valuation metrics.”

Barclays downgraded Hochschild Mining to ‘equalweight’ from ‘overweight’ but lifted the price target to 280p from 180p. It said that in the near term, the company needs to find the ounces to sustainably increase production and reach its target of 10 years of reserve and resources. “That won’t happen overnight,” the bank said.

More generally, the bank lifted its stance on the European mining sector to ‘positive’ from ‘neutral’.

Barclays got a boost on Wednesday as HSBC upgraded the stock to ‘buy’ from ‘hold’ and lifted the price target to 190p from 150p saying the pending disposal of Barclays Africa will be positive for sentiment.

“The disposal of business held within the Non-Core businesses is a management priority for 2016, and the expectation is that negative income and expenses within Non-Core will be significantly lower in future years,” HSBC said.

It said management’s contention is that core Barclays, even including the investment bank, is a strong franchise with strong underlying profitability, so the fastest way to produce shareholder value is to exit non-core activities as soon as possible.

“A simple explanation for the group’s current £28bn market capitalisation is its £48bn net tangible equity with a sustainable return of 7% evaluated against a cost of equity of 12%. The sustainable return might be considered as a 12% return from the businesses constituting Barclays’ Core offset by a five percentage point drag from Non-Core.

“If Non-Core was then entirely eliminated and its residual £8bn of tangible equity transferred to Core, then the Core return would be diluted down but the group would still be left with an overall return of 9.9%. It should then, theoretically at least, have a market value 40% higher than at present.”

HSBC said the main downside risks stem from higher household and corporate impairments as the UK economy slows due to the exiting of the European Union and its single market.

Deutsche Bank on Wednesday downgraded its rating on Ocado Group to ‘sell’ from ‘hold’ and reiterated a target price of 220p after the online supermarket issued a cautious outlook on margins.

Ocado last Tuesday warned that the supermarket price war has been eating into profit margins as it reported its third quarter trading update

“As the market remains very competitive, we are seeing sustained and continuing margin pressure,” the group’s chief executive, Tim Steiner, said.

The company reported a 19% increase in orders to 226,000 but the average value of each order fell 3.4% to £107.94.

Following the trading update, Deutsche Bank has kept its full year earnings before interest and tax forecast of £21m, 12% below consensus.

The bank noted that Ocado’s rival Tesco has experienced slowing online growth, driven by an increase in the minimum basket size for free delivery to £40 from £25, along with a rise in delivery fees. Tesco’s online market growth has fallen to 7% in the first half of 2016 from 15% in the first half of 2015.

“Ocado is benefiting from a less competitive Tesco but based on our Ocado profit forecasts, the incremental basket is not profit enhancing, under either model,” Deutsche Bank said.

“While we recognise the difficult industry backdrop driving gross margin pressure is outside of management’s control, we don’t expect this to change."

Deutsche Bank added that Tesco’s situation is significantly more material to Ocado’s near-term performance than the launch of Amazon Fresh in London.

“That Ocado cannot deliver profit improvement in this environment confirms our long held view about the challenge of profitably growing the market with incrementally smaller baskets under the Ocado model.”