Broker tips: Burberry, Tate & Lyle

Burberry rallied on Wednesday after Exane upgraded the shares to 'outperform' from 'neutral' and lifted the price target by 29% to 2,700.0p.

It noted that while all luxury stocks are now above their pre-Covid-19 levels, Burberry is still 8% below its January 2020 peak of 2,329.0p and trading at around a 30% discount to peers.

"We believe the discount in valuation is currently pricing in that Burberry i) will take much longer to recover from Covid-19 than peers and/or ii) is structurally a weaker brand," Exane said. "We disagree on both assumptions and find sell-side and investor sentiment too bearish."

Notably, the market has focused on the short-term negative impact of Burberry's conscious decision to reduce markdown to its top-line rather than the long-term positive impact to its brand image and gross margin, Exane said.

The bank also said the company's transformation is not priced in. It pointed out that since the pandemic started, apart from the third quarter ending December 2020, Burberry has posted better-than-expected sales.

Berenberg upgraded its stance on shares of Tate & Lyle to 'buy' from 'hold' on Wednesday, pointing to the increasing likelihood that an eventual separation of the speciality Food & Beverage Solutions (FBS) unit and bulk Primary Products (PP) unit will occur.

At the full-year results last week, the company confirmed that discussions with potential partners about the split were ongoing.

"We believe this transaction would lead to a material re-rating of Tate & Lyle, from a current 14x price-to-earnings, more than offsetting earnings dilution, with 25% upside to our fair value for this scenario of 955p," said the bank, which also lifted its price target on the stock to 855.0p from 730.0p.

Even if the current discussions end, management is now determined to undertake a similar transaction in the future, which will continue to support the valuation, Berenberg added.

"A growing track record of solid execution and an improving outlook also mean our discounted cash flow valuation for the existing business structure of 855p implies 12% upside (still implying just a 15x 12-month forward P/E)."