Broker tips: Bunzl, Debenhams, Randgold Resources
Bunzl was under the cosh on Friday as HSBC downgraded its stance on the distribution and outsourcing group to ‘hold’ from ‘buy’ given the valuation multiples and macroeconomic uncertainty.
“We expect that margins in Europe and UK are likely to be hit by a weaker exchange rate relative to the USD, albeit with a 4-6 months lag due to hedging.”
On a longer-term basis, however, HSBC said the shares remain attractive. It said Bunzl’s target markets tend to be grocery, food service, cleaning and safety, which are by nature defensive.
“In a recessionary environment, investors prefer such defensive exposure. Moreover, if the recession is driven by an industrial slowdown, the consumer exposure may leave Bunzl's volumes relatively more secure.
“More importantly, the company actively focusses on products that are not for resale and represents a small portion of the customer's cost base. These characteristics and ability to switch to lower priced/high gross margin own brand product enables the company to offset some of the input cost fluctuations.”
HSBC said its scenario analysis for Bunzl suggest the company needs to continue delivering on M&A momentum in order to justify the current valuation. If the M&A momentum comes to a halt, the shares’ valuation could easily de-rate to 1,710-1,860p, it said.
The bank lifted its price target on Bunzl to 2,400p from 2,140p.
HSBC downgraded Debenhams to ‘reduce’ from ‘hold’ but nudged the price target up to 55p from 53p, pointing to long-term structural concerns.
The bank said a rally in GBPUSD has supported a rebound in wider sector valuations. However, Debenhams is structurally challenged.
It noted the company has 165 UK department stores with average lease lengths of around 22 years versus around seven to eight years for Next, and M&S with freehold ownership.
“Next and M&S also have a volume-led advantage on price. As a result, Debenhams has less flexibility to reduce fixed costs to adapt to a rapidly evolving, increasingly competitive omnichannel market.”
The bank said that while new chief executive Sergio Bucher – ex-Amazon Fashion Europe, Puma, Nike, Inditex – arrives in October and is likely to drive change, any clarity on strategy seems unlikely before the interim results in April 2017. In addition, the investment required to reposition the group as an online play on international markets, or to restructure UK property exposure, is likely to be significant.
“In the interim, we expect competition to increase, driven by a challenging macro and price repositioning at key competitors.”
UBS upgraded Randgold Resources to ‘buy’ from ‘neutral’ with an unchanged price target to 9,750p on the back of share price weakness and strong momentum in the second half of 2016.
UBS said that following a correction of more than 20% from the stock’s July 2016 peak, the risk/reward is now attractive, hence the upgrade.
The bank said it reckons Randgold can meet full-year 2016 production guidance, which will provide the group with strong operating momentum in the second half versus low market expectations.
UBS said two consecutive quarters of weak operating performance have left investors questioning the company’s reputation as a reliable operator that warrants a premium valuation.
The bank, however, said it was encouraging that Randgold provided very clear details in the second-quarter results on throughput/grades/recoveries required at each asset in the third and fourth quarter to achieve the FY16 group production target of 1.25moz.
“We also believe the market underestimates the potential for a material lift in the 2017 dividend that would clearly differentiate Randgold from its global gold mining peers.”
In addition, the bank said it likes Randgold’s low cost position, stable medium-term production, full year 2017 free cash flow and strong balance sheet.