Broker tips: Burberry, Barratt Developments, Johnson Matthey

Goldman Sachs upgraded its stance on luxury brand Burberry to ‘neutral’ from ‘sell’ and lifted the price target to 1,690p from 1,595p as it said the risk/reward is now more balanced.

The bank noted that since being added to its sell list in June last year, the shares are down 1.6% in absolute terms, compared with the broader European market up 7.3% and the luxury sector up 16%.

"Overall, we see Burberry navigating the adverse impacts of the pandemic well, particularly measured by the resilience in gross margin. In context, we raise our gross margin forecasts, which helps drive our higher EBIT forecasts (+7% per annum FY21-23E)," it said.

"We remain cautious on the medium-term margin trajectory at Burberry, given the risks we see of higher investment to support brand momentum as the sales environment normalises. However, we see strength in luxury consumption within mainland China, coupled with higher full-price sales mix, which should provide additional flexibility for investment in opex."

Analysts at Liberum upgraded Barratt Developments from 'hold' to 'buy' and raised their target price on the homebuilder to 735.0p from 690.0p on the back of the group's better-than-expected first-half earnings.

Barratt ended the first half with pre-tax profits 7% ahead of consensus estimates thanks to margin strength, said Liberum, which highlighted that the company's solid first-half outcome benefited from some price inflation and controlled costs.

Liberum, which raised its 2021 earnings per share forecasts by 8% on improved full-year margin assumptions, pushed its outer year forecasts up by 9-11% as it revisited expectations for house prices.

"We no longer think that they will drop meaningfully through the middle of this year, as we expect homebuyers' remarkable determination to endure," said Liberum, which added that he highly discussed cliff edges of Help to Buy, Stamp Duty and furlough were all being "negotiated successfully".

Barclays downgraded specialty chemicals company Johnson Matthey to ‘underweight’ from ‘equalweight’ and cut the price target to 2,570p from 2,640p.

The bank said its analysis of the process technology for lithium iron phosphate (LFP) batteries suggests key patents will expire in the next year.

"We believe Chinese producers are not currently beholden to these patents as long as material is used exclusively for the domestic market. That could explain why LFP has become so popular in China but is rarely used elsewhere.

"Expiry of those patents would relieve Chinese producers of the burden of paying royalties on exports, which could trigger expansion into new markets, and there's early evidence that (Chinese batter manufacturer) BYD is already drawing up growth plans."

Barclays said this expansion could shrink total addressable market estimates for producers of high-nickel cathodes such as Johnson Matthey.

"In time, we expect high-nickel pricing in Europe to come under pressure too. JM looks most levered to this risk with valuation close to peak so we downgrade to UW," it said.