Broker tips: Burberry, Glencore, Zoopla

RBC Capital Markets cut Burberry’s rating to ‘underperform’ from ‘sector perform’ on Thursday, saying it expects the retailer's full year earnings in 2017-18 to be below the sector average.

However, the broker raised its price target to 1,300p from 1,275p as it said the luxury fashion group’s “equity story is evolving towards a more moderate top-line growth profile”.

RBC also increased its full year 2016-17 pre-tax profit forecasts by 2% and 7%, respectively, solely on favourable foreign exchange movements since mid-January.

“Management continues to do all the right things for the brand in the long term, but the combination of operating expenditure-deleverage, performance related pay reinstatement and a further drop in Japanese licensing revenue should lead to further margin pressure and below sector-average earnings before interest and tax (EBIT) growth in full year 2017-18,” said RBC analysts Rogerio Fujimori, Richard Chamberlain, Piral Dadhania and Claire Huff.

Burberry's compound annual growth rate is expected to be 4% versus 8% for its luxury peer group.

RBC has forecast adjusted EBIT of £438m for 2017, up from a previous estimate of £409m, and £454m for 2018, compared to an earlier projection of £436m.

The analysts hailed Burberry’s strategic focus on digital and said it continues to see the brand equity strengthening.

They also noted that management has been addressing legacy issues and investing in brand promotion.

“But this comes at a cost at times when demand for its all-important Chinese cluster is weak,” the analysts warned.

Key risks include further weakening of the pound against other key currencies, bigger-than-expected cost cutting in 2017, a large share buyback and potential corporate activity, RBC said.

JP Morgan Cazenove reviewed its ratings on a number of metals and mining stocks as it took a look at the sector and recommended selling the recent rally.

The bank noted Chinese demand growth is slowing, oversupply is rising and previous super-cycles suggest spot prices could carry a further downside risk of around 33%.

“Our recommendations already reflect this bearish view, but as we move beyond typical Q1 seasonal demand strength and with the UK mining sector +42% from its January 2016 lows, we recommend selling the recent rally.”

It downgraded Glencore to ‘neutral’ from ‘overweight’ with a 130p price target, saying the agriculture unit stake sale brings to a close the catalyst-rich deleveraging story.

“GLEN retains a strong free cash flow profile and valuation does not look particularly expensive; however, we believe downside risk to copper and zinc prices will drive negative earnings momentum over the next few months.”

JP Morgan Cazenove downgraded Antofagasta to ‘neutral’ from ‘overweight’ and slashed the price target to 410p from 600p. It cut Kaz Minerals to ‘underweight’ from ‘neutral’ but lifted the price target to 125p from 105p and downgraded First Quantum Minerals to ‘underweight’ from ‘neutral’ but raised the price target to 300p from 140p.

The downgrades above reflect JPM’s view of copper price downside risk.

JP Morgan said China’s slowing commodity demand and significant expansion of supply in base metals, coal and iron ore over the past decade continue to push markets into oversupply that it expects to persist across 2016-17.

In addition, it said that despite weakening year-to-date, it expects the US dollar to remain relatively strong for the rest of the year, which is negative for the pricing power of commodity consumers.

“As a result, we expect commodity prices and producers’ earnings momentum to resume their decline and we believe prices for most commodities will need to trade into the cost curve to incentivise capacity closures.”

UBS has downgraded Zoopla to a 'neutral' recommendation from 'buy' due to continued competetive pressures from rival OnTheMarket, but left Rightmove at 'buy'.

UBS said its Evidence Lab research team had unearthed data on the UK property portal marketplace that indicated estate agency collective OnTheMarket had continued its momentum in 2016.

The research showed OnTheMarket grew 6.8%, ahead of Rightmove's 1.1% and Zoopla's 0.7%, as well as increasing its share of app downloads.

"We maintain our view that OTM is unlikely to be a major long-term player, but remain for the number two player Zoopla, which has been more impacted since OTM's launch."

Of the FTSE 250 pair, Rightmove's market leading position remains strong, UBS said, with year-on-year agent growth of 4.9% to March and leading app stats being supportive of this.

"Overall, we see the launch of OTM as having actually strengthened the position of Rightmove by making it a stronger number one in the segment, with Rightmove now having circa 65% more properties listed for resale than Zoopla."

But Zoopla is downgraded due to OTM's threat, having grown its share of agents in the first quarter, while Zoopla "continues to show no sign of a significant recovery in agents".

The quarter saw agent growth of 3.3% compared to OTM's growth rate of 18.5%.

Zoopla's target price is nevertheless slightly increased to 260p from 250p.