Broker tips: BTG, Lloyds, Tesco
Analysts at JP Morgan took a fresh look at British pharmaceutical company BTG on Friday, cutting their target price on the back of lower forecasts for sales of its Roxwood and Varithena products, but above all as a result of the anticipated lower contribution from PneumRX - its upcoming lung therapy - and due to foreign exchange headwinds.
The company's 2018 pre-close trading update was as expected, but the outfit's caution on its PneumRx product, which management warned would not live up to expectations, saw its shares register their biggest single-day decline in a decade.
JPM's analysts noted that while overall top-line performance was in line with guidance, BTG's update on PneumRx led to a £150m impairment on the asset, lowering expectations and leaving the group looking at "immaterial" sales for that product across the next two years.
"We await FY18 results on May 15th to get a clearer view on BTG's longer-term growth outlook, but we do see current levels as more attractive from a valuation perspective, with PneumRx now de-risked," they added.
"We take our PneumRx sales down to low-single-digit for the next two years, with sales remaining only mid-single-digit longer term. After also lowering PneumRx OpEx, PneumRx no longer makes a positive contribution to our NPV," James Gordon and his team at JPM noted on Friday morning.
JPM also said that BTG's lower group tax rate as a result of Donald Trump's recent amendments to the US tax code, down from 25.5% to 21% for its current trading year, was likely to be "largely offset" by marking-to-market on FX due to the strength of sterling against the US dollar.
JPM reiterated its 'neutral' rating on BTG.
Analysts at Credit Suisse said Lloyds continued to be their preferred lender in the UK, pushing their estimates for its earnings per share further past what the consensus was expecting in the process.
In particular, the Swiss broker highlighted the combination of low risk, capital generative retail exposure with upside from an improved macroeconomic backdrop, higher interest rates and falling risk premium as Brexit talks continued to make headway.
They also bumped up their EPS forecasts by 1%, 4%, 6% for over the period between 2018 and 2020, respectively, pointing to Lloyd's improved loan impairment guidance - which put them between 7% and 12% ahead of consensus.
Analysts Claire Kane and David Da Wei Wong further pointed out how despite the consensus marking-up its EPS estimates, the shares had not moved since the lender's strategy update.
On the back of all of the above, they reiterated their 'outperform' recommendation on the shares and 85p target price, saying that at their target price, and on their estimates, the shares would be changing hands at a price-to-earnings multiple of 12.0.
Berenberg upped its stance on Tesco on Friday as it took a look at the UK food retail sector.
The bank upgraded Tesco to 'buy' from 'hold' and lifted the price target to 255p from 190p. It said conditions in the sector are improving, with inflation headwinds easing and competitive pressures subsiding.
"Tesco’s recent store like-for-like outperformance, underpinned by improvements in customer satisfaction and in-store execution, together with further revenue self-help opportunities in mid-tier own label make us more optimistic on mid-term margins in UK retail segment."
In addition, it said that following the collapse of wholesaler Palmer & Harvey, there is further upside to deal synergy guidance and Berenberg expects strong earnings per share, free cash flow and leverage accretion post the integration.
"We view Tesco as the most attractive investment in food retail, providing 30% EPS compound annual growth rate in 2017-2019 while trading on 13.5x price-to-earnings and 8.0% free cash flow yield in CY 2019."
The bank recommended buying the stock ahead of the FY 2017 results on 11 April 2018, which it sees as a positive catalyst.