Broker tips: Glencore, SuperGroup, Meggitt

Glencore got a boost after JPMorgan Cazenove upgraded it to ‘overweight’ from ‘neutral’ with an unchanged price target of 160p, as it pitched the stock against rival Anglo American.

It pointed out that Glencore and Anglo American provided strategy updates last week.

“In our view, Glencore defined a credible strategy to generate $2.3bn of positive free cash flow in 2016, reverse balance sheet risk and create value for equity holders at spot commodity prices.”

It said the key surprise at the investor day was the extent of cost cutting in zinc, copper and coal, which drives a $2bn uplift in its 2016E EBITDA to $7.6bn at current prices.

“AAL’s outlook is less positive, it will generate -$1bn FCF and YE’16 ND/EBITDA will stretch to 3.8x at spot prices,” the bank said.

JPM said it estimates that Glencore is the only diversified miner with positive cash flow in 2016 at spot prices, adding that it is an interesting alternative to Rio Tinto.

JPM said it retains concerns over the long-term impact of aggressive cost cutting and the risk to Glencore’s balance sheet at lower prices, but decisive measures credibly mitigate the risk of dilution for equity holders.

“In contrast, AAL's excessive leverage means this risk should continue to grow as we head into 2016.”

SuperGroup traded sharply lower after Liberum downgraded the stock to ‘hold’ from ‘buy’, noting that the shares are up 85% since it upgraded them last December.

“With the stock now trading on 24x 2016 earnings, a 50% premium to its long-term average, we downgrade to hold and advise investors to take profits,” it said, adding that in the absence of positive catalysts, it sees more downside risk.

The brokerage said it upgraded forecasts and the target price in May, and again in early November but tough comparators lie ahead and trading conditions across the High Street are deteriorating.

Liberum said first half sales were strong but scope for positive surprises is limited.

It noted that at the time of the H1 update on 5 November, momentum was strong heading into the Christmas trading period.

However, Liberum said momentum can be a fickle thing and the brokerage sees evidence that it may have shifted in the past six weeks.

In its report in early November, Liberum pointed out that competition was increasing and that there might be some excess inventory.

“We find that SuperGroup is having to deal with both. Promotions elsewhere on the High Street are deep, up to 60%; and we see promotional activity, both in store and on line at SuperGroup, not necessarily more than last year, but surprising given the strength of Q2 sales leading into the period.”

“Sales comparators get much tougher in H2 and with 75% of group profits to come from H2 as well we see little room for error.”

Liberum has a 1,500p price target on the stock.

Meggitt has been upgraded by Berenberg from ‘hold’ to ‘buy’, saying the company is well positioned to benefit from strong growth drivers in its civil aerospace markets.

It comes after the FTSE 100 company, which is due to join the FTSE 250 next week, issued a profit warning in October and last week confirmed full-year guidance and provided an outlook for 2016.

Berenberg said on Tuesday that they’ve learned more about actions being undertaken to address the company’s current headwinds.

“We were reassured that business fundamentals have not changed materially and that downside risks are being mitigated.”

Berenberg also noted that management and directors have bought shares worth nearly £1m since the profit warning, and that the company has also reiterated its commitment to a progressive dividend policy.

With the shares looking attractive against peers, it upgraded the stock but also revised its target price down from 536p to 445p.