Broker tips: Babcock, AO World, Burberry

Babcock's mission critical services division failed to deliver at the half-year stage, but analysts at Panmure Gordon had anticipated it and other parts of the business acted as an offset.

Hence, analyst Michael Donnelly stuck to his 'buy' recommendation.

The engineering support services company´s MCS division had been the driver of the investment case for more than a year but now it looked as if the fiscal year would be at the lower end of guidance for growth of 0%, Donnelly said.

As well, despite the stock's outperformance over the last couple of months - circa 6% - it was still trading about 10% below Panmure's target price of 1,108p, putting them on 14.1 times its estimate of 2016 earnings per share - in line with the shares’ ten-year median rating, the analyst said.

AO World's shares will likely come under pressure amid an "erratic" retail environment thus far in the third quarter and after the company posted larger than expected losses per share for the first six months of its financial year, Shore Capital said in a research note sent to clients.

However, analyst George Mensah retained his 'buy' recommendation on the belief that management will "deliver on its strategy and will become sufficiently profitable with scale".

Regarding the company´s aim to extend its reach into Holland, with trading due to commence in Spring 2016, around the start of its fiscal year 2017, the analyst pointed out that it represented a €3.2bn opportunity for the retailer.

However, "this investment in marketing we believe is necessary, with brand awareness still weak relative to AO’s market share position," the broker said.

Nevertheless, he added that "short-term multiples remain astronomical."

According to Mensah's calculations, the company's current EV/EBITDA for the full-year stood at about 134, falling to 65 times in fiscal year.

Luxury stocks in Europe were under the cosh on Tuesday after Nomura said expectations for 2016 may be too high and there is a risk of a sector de-rating.

The Japanese bank said it was cautious on the European luxury sector in the short term given an uncertain macroeconomic environment, volatile forex and weaker Chinese consumer sentiment owing to the country’s volatile stock market.

In the longer term, however, Nomura has confidence in underlying demand from China for luxury goods and said its research suggests rising disposable incomes, a reduced income gap, and increased spending on discretionary items in China all support increased luxury spending.

It downgraded Burberry to ‘neutral’ from ‘buy’ and cut the price target to 1,500p from 1,700p. The bank cut Hugo Boss to ‘reduce’ from ‘neutral’, lowering the price target to €95 from €120 and downgraded Tod’s to ‘reduce’ from ‘neutral’, trimming the target to 76p from 80p.

Finally, it downgraded Swatch to ‘neutral’ from ‘buy’ and slashed the price target to CHF410 from CHF460.