Broker tips: Associated British Foods, Anglo American, KAZ Minerals, IMI, Renishaw

Credit Suisse analysts told clients they expected a strong set of results from Associated British Foods in the near future, thanks in no small part to its Irish high street retailer Primark.

On Primark, the analysts said: "Over the next year, the key will be the extent that Primark can absorb the benefits of lower input costs as US$ hedges roll off. While apparel retail has typically been deflationary, we believe most retailers need to rebuild margin and will maintain prices. We forecast Primark margins increasing 45bp in 2H and 35bp in 18/19, but with margins well below historic levels, see considerable upside potential."

As such, the company’s dividend per share was seen rising by 5% to 43.00p in 2018, with further year-on-year increases of 2.00p forecast for 2019 and 2020.

However, in general, they believed that ABF was in line for a relatively uninteresting year in comparison to last year's "fireworks", which saw sales rise 19%, driving a 36% jump in the company's EBIT.

Analysts also saw it fit to reduce their target price on the shares from 3,700p to 3,300p, due to weak retail peer multiples.

"The shares have fallen 25% in 6m and de-rated partly in response to the predictable cyclical downturn in sugar, but principally in response to the derating of apparel peers. However, we now believe that Primark is discounted at £11bn, ie 12.7x 12m FWD EBIT and 16.3x PER which materially undervalues its L-T growth prospects relative to peers, particularly given the strengthening margin outlook," said analysts.

Analysts at JP Morgan reiterated their 'overweight' stance on shares of Anglo American and KAZ Minerals.

On Anglo American, they said the company had "scope" to beat expectations, highlighting the improving risk profile of its activities in South Africa, as highlighted by the recent High Court ruling in that country, adding that a restructuring of its operations there remained a "valuable" - if distant - option.

Back out the marketing division and those multiples were even more "compelling", at 4.3 and 3.7, with the outfit also offering a "well-articulated" medium-term capital allocation strategy - "which could result in above-consensus shareholder returns."

Among base metals, the investment bank's "favoured" producer was KAZ Minerals, which was offering growth, low-cost operations, attractive valuation (5.6- 5.2x 2018/2019E EV/EBITDAs) and an ongoing transfer of value from debt to equity holders.

JP Morgan lifted its target price on Anglo's shares marginally, from 2,000p to 2,010p, and did the opposite with KAZ's, trimming its target from 1,020p to 1,000p.

Elsewhere, Analysts at Peel Hunt mulled over the UK industrials sector on Monday, giving investors some fresh insight on IMI and Renishaw in the process.

Peel Hunt highlighted 2018 as being "a pivotal year for IMI", as the broker expected to see the company generate organic revenue growth for the first time since 2014 as it enters the "up to full speed" phase of its strategy execution timeline.

Peel Hunt nudged its 2018 EPS number by 0.2p to 69.2p, while 2019 went up by 3.4% to 76.5p, with the of organic revenue growth predicted to top 3% followed by 3.9% and 3.8% respectively for 2019 and 2020.

"Our target price is based on a 2018 EV/sales, EBIT margin correlation of 1.4x, which comes through at 1,250p. On this basis, we can nudge our recommendation to 'add' from 'hold'," the analysts said.

On Renishaw, which Peel Hunt referred to as a "superb business", the analysts gave it a "premium rating", but noted it was "not bullet-proof", and that its communication with the market had not always been sufficient for it to feel completely comfortable with its forecasts.

Peel Hunt singled out some longer-term concerns about Renishaw's management succession scenarios, but noted that as shares were coming back to within 5% of its target price, it made the move to bump its recommendation back up to 'hold'.

Renishaw itself anticipates full-year revenues of £575-605m, and a pre-tax profit of around £136-156m, while consensus was at £599.6m and £140.1m, while the broker itself had pushed for £601m and £144.5m.

The analysts highlighted that Renishaw's key to profitability will be its progress in Healthcare, which it expects to break even by the end of FY19E.

"Our TP equates to a PER of 24.6x FY19e, a premium that reflects the quality of the Renishaw business," the analysts concluded.