Broker tips: Associated British Foods, Ascential, BP

Shares in Associated British Foods were given a boost by an upgrade from Jefferies to a 'buy' recommendation on the back of continued strength in its sugar business and an expected upturn in margins from its Primark retail arm.

The investment bank, which upped its target price to 3,100p from 2,450p, said interim results next Wednesday should confirm strong results with sales up 18% and earnings per share up 28% thanks to currency effects and a sugar rebound.

While expecting minimal Primark progress in the first half, Jefferies felt the key focus will be on Primark's future margin trajectory and itself forecast that by the 2018/19 financial year the fast fashion chain will enjoy an improvement of 100 basis points to 10.4% from the 9.4% trough in the current year.

"Evidence of price recovery is starting to come through in Germany, and we expect this to extend to the UK by Autumn/Winter 2017. Our proprietary pricing shows remarkable price discipline at Primark UK despite the pain from six-month sourcing lead times."

For sugar, analyst James Grzinic assumed up to £200m of operating profit can be defended post the quota removal in September 2017, as the slump in sterling has severely dented the competitiveness of French imports in the UK.

The analysts also suggested bumper year-end cash levels would support "as much as £3bn of M&A firepower" to boost future earnings, based on management's impressive recent track-record on M&A value creation.

Grzinic said Primark's valuation attractions were emerging, with calendar 2018 price/earnings ratio of less than 22 compared to the peak of around 40 times in late 2015, while its shares had a relative discount of circa 10% in the staples sector was close to the trough of the past five years.

Ascential

Goldman Sachs reiterated a Conviction List ‘buy’ rating on Ascential as it expects its growth to continue with acquisitions, disposals and new product launches.

The business-to-business media company could return 25% to investors as its business mix has improved “significantly” since it floated last February and with the acquisitions of MediaLink and OneClick Retail and the planned sale of its ‘heritage brands, GS said. This would drive organic growth up by 100 basis points and earnings before interest tax depreciation and amortisation (EBITDA) margins by 150 basis points.

The bank said that profitability will stall in 2017 due to the planned investments, but these initiatives could set the stage for future growth.

On top of this, Goldman expects continued deployment of cash in mergers and acquisition activity to add 2-3% per year to EBITDA.

Goldman’s 2017/18 financial year EBITDA estimates declined 3.8%/3.1% due to planned investment in new products and its 12 month price target of 398p from 402p, remains 70% based on 16.5 times the 2018 price-earnings ratio and 30% based on a merger and acquisition value of 470p, reflecting historic transaction multiples.

The stock trades on about 14 times the 2018 price-earnings ratio and an 11% free cash flow yield which Goldman sees as attractive against the EU media sector, which is on 16 times the price-earnings ratio, with a free cash flow yield of 6.5%.

BP

'Keep it simple', analysts at Barclays advised investors in BP shares, highlighting how if the dividend was sustainable then the yield on offer was 7.0% and pointing to a number of projects which were expected to start up in the second half of 2017.

In their view, 2016 was one of implementing change and preparing the company for a period of sustained growth.

Last year, BP reduced upstream costs by 17% and cut its headcount back down to 2005/06 levels, the broker said.

It also replaced its reserves for the first time since 2013.

The ADCO concession helped BP in that but it nonetheless does support the company's target of 5% production growth out to 2021.

Barclays reiterated its 'overweight' stance and 625p target price for the shares.

"In many ways, it would be easy to overcomplicate the investment case for BP, but for us, the attraction is in the simplicity. If the dividend is sustainable, then the shares, which offer a 7% yield, remain meaningfully undervalued, and we expect to see a differentiated performance, particularly from 2H 2017 as a number of the larger projects start up."