Broker tips: Greene King, UK water, Lonmin

Greene King slumped on Friday after JPMorgan Cazenove downgraded the stock to 'neutral' from 'overweight' and cut the price target to 750p from 810p as it pointed to the absence of a compelling catalyst to cause a bounce-back.

The bank noted that cost headwinds in the pub sector - arising from the national living wage, the apprenticeship levy, business rates and higher costs of imported food and drink - are significant, adding that while it was integrating its acquisition of Spirit, Greene King had the chance to offset some of these pressures through the delivery of synergies. "The integration is now complete, but the cost pressures remain."

"With the risk that UK consumer spending will deteriorate in the months and years ahead, it is difficult to see a positive catalyst on the horizon," JPM said, highlighting the fact the shares have underperformed in recent months as cost pressures have intensified.

JPM said that with the Spirit integration now complete, the pub operator needs to work hard on other strategies to try to mitigate as much cost inflation as it can.

Analysts at Credit Suisse downgraded their view on the UK water sector, telling clients there was a fair chance that OFWAT would be less generous in its next regulatory price review, PR 19.

The review would mark a turning point for the sector after the windfall returns over the past 10 years which saw this group of stocks trade at premiums of between 20% to 25% versus the value of their asset base on an enterprise value basis.

Those racy valuations had also driven mergers and acquisitions activity at high multiples, the broker pointed out.

Then, of course, there was the no small matter of rising political risk in Britain.

Key to all of the above, the Swiss broker estimated OFWAT would set a baseline weighted-average-cost-of-capital below 3% for the period running from 2020 to 2025.

Metal miner Lonmin pushed higher on Friday after it was boosted by an upgrade to ‘neutral’ by Goldman Sachs.

Lonmin’s rating was raised from ‘sell’ as Goldman believes the company to be over its recent underperformance. The bank left its 12-month price target on the stock unchanged at 60p.

GS suggested the company's recent underperformance was now likely to subside, despite consistent challenges relating to its balance sheet. Analysts said it would be difficult for Lonmin to cut costs but firmer metal prices could drive it higher.

“It has limited levers to cut costs, in our view, given opposition around retrenchments, both from the union and the government. As such, without the market for PGMs moving into deficit we expect that Lonmin will continue to burn cash,” analysts said.