Broker tips: Antofagasta, RPC, Flybe

Antofagasta shares dropped on Thursday as Canaccord Genuity downgraded the stock to ‘hold’ from ‘buy’ and lowered its target price to 475p from 550p.

Canaccord said changes to the Chilean tax regime through 2018 may put pressure on Antofagasta’s net margin and dividend.

“The company has a stated payout ratio of 35% now, but on our forecasts of a lower net margin going forward we think only a 2% dividend yield is likely through 2018,” according to Canaccord analysts Tim Huff and Nick Hatch.

“We do not see the potential for Antofagasta to return to a +3% dividend yield until after 2018.”

The analysts said while they see potential for operational progress in the coming three years at Antofagasta, tax pressures will weigh.

They said signs of a greater cost focus at the half year stage would be positive for the stock under Ivan Arriagada, who was appointed chief executive in April.

“While the stated strategy remains unchanged at Antofagasta, we see potential for Ivan to take on a greater cost focus in the coming 2-3 years.

“While the past four years have been focused on portfolio repositioning and necessary (but unpopular) capex spend in a downturn, Antofagasta could now be well positioned to deliver moderate volume growth and cost consolidation.”

RPC Group’s ‘add’ rating and target price of 900p were reiterated by Numis after the plastics firm said it had agreed a £261m deal to buy British Polythene Industries (BPI).

RPC said it was launching a £90m share placing to part fund the acquisition. The company will pay BPI shareholders 470p a share in cash and 0.60141 of new RPC shares.

The offer is worth around 940p per British Polythene share, a 30% premium to the stock's closing price of 725.00p per share on Wednesday, RPC said.

“Strategically, the transaction provides a platform for the Group in the polythene films market, enhances polymer purchasing power and is in line with its Vision2020 growth strategy,” Numis analyst Kevin Fogarty said.

“The acquisition is expected to be accretive to earnings per share in fiscal year 2017 and materially accretive thereafter and we will look to revise our forecasts for the group following today's analyst presentation.”

Flybe shares fell almost 5% as Numis rated the stock as a 'buy' with a 132p target price.

Numis said Flybe's reported pre-tax profit of £5.5m, from a £25.4m loss, was ahead of the brokerage's forecast for £3m.

This meant the regional airline had achieved an important milestone in its transformation, said analyst Wyn Ellis.

"Trading conditions in the sector were challenging during H2 and, in our opinion, the results demonstrate improved management controls and greater resilience, with a strengthened balance sheet and progress in key KPIs," Ellis said.

Numis noted that Flybe, looking ahead, had confirmed a challenging industry environment given the spectre of terrorist activity, industrial unrest in France, consumer uncertainty and the highest level of seat capacity growth in the European short-haul market for six years.

However, the airline had promised to remain disciplined in pricing, and that it would continue to focus on unit cost reduction and maintain its capacity discipline through continuing fleet transactions.

"Market conditions continue to be tough and we believe that the revenue environment has deteriorated in recent months," said Ellis in a research note.

"Flybe notes that it is already taking cost and capacity actions to support growth in FY 2017 and the profit and loss (statement) will also benefit from lower E195 costs, reduced fleet costs and a reduction in the unit fuel bill."

Numis had, reflecting the tougher industry revenue outlook, trimmed its FY 2017-estimated pre-tax profit forecast for Flybe to £21.7m, from £23m, with more modest progress now expected in FY 2018.