Broker tips: Glencore, Rolls-Royce, Hammerson

Glencore’s shares declined on Thursday after Citi cut its target price to £1.40 from £1.50, reflecting lower commodity price forecasts.

Citi said its estimates for 2016 earnings before interest, tax, depreciation and amortisation falls by 5.1% to $7.8bn (£5.35bn).

Glencore is expected to generate free cash flow of $3.8bn in 2016. Net debt is forecast to come in at $25.4bn for 2015 and $20.8bn by the end of 2016 compared to the company’s target of $18-19bn.

Citi hailed Glencore’s early refinancing of a $8.45bn loan facility which was due to expire in May.

“We think it is a positive step and shows the commitment of the banks to Glencore and also removes some near-term liquidity concerns. Our NPV declines to £2.70 from £2.90; we lower our TP to £1.40 from £1.60. Buy,” said Citi analyst Heath Jansen.

JPMorgan Cazenove upgraded Rolls-Royce to ‘neutral’ from ‘underweight’ and lifted the price target to 690p from 395p.

It said although many headwinds remain, news flow over the next six months is biased to the positive.

JPM said it had been expecting the aerospace and defence group to cut its guidance when it reported last week.

However, this was not the case and management was more prudent with its November 2015 guidance than JPM thought.

Last week, Rolls-Royce cut its final dividend by 50% - the first dividend cut in 25 years – as it announced a drop in full year underlying profit that was not as bad as some had feared.

“We cannot rule out further EPS downgrades if macro conditions deteriorate, and/or certain industry trends deteriorate (eg. the number of parked RR aero engines increases); but this looks much less likely in the next six months,” JPM said.

It said that while RR looks very expensive based on its depressed earnings in the next few years, many investors now appear willing to value the stock on potentially much higher profits towards the end of this decade or early the next.

JPMorgan said the company’s new management was making progress, with financial disclosure and communications with investors and analysts improving.

“A new cost reduction plan is in place; however, we think much greater cost reduction is needed if RR is to achieve its 2020-2025 profit targets.”

Exane BNP Paribas downgraded Hammerson to ‘neutral’ from ‘outperform’ and cut the price target 9% to 260p, saying balance sheet constraints will cap future earnings growth.

It noted the company has delivered the leading funds from operations/share growth amongst its peers since becoming a retail specialist REIT.

However, Exane argued that this was no longer sustainable due to a balance sheet which is now stretched relative to self-imposed loan-to-value and net debt/EBITDA limits.

“We see FFO growth slowing rapidly post- 2016 as disposals are used to fund long-dated development projects,” it said.

The bank said an estimated 2016 funds from operations yield of 5.2%, growing at 4% compound annual growth rate is no stand-out in terms of income attractiveness.

“Below average total returns also provide little reason for a re-rating on NAV grounds. As such, we struggle to make the case for owning Hammerson over Klepierre at this point in the cycle and downgrade to neutral.”

Exane pointed out that since the inception of Hammerson’s retail-specialist strategy, the stock has underperformed UK REIT peers in periods of UK outperformance and underperformed retail peers Unibail Rodamco and Klepierre when the UK shows relative weakness.