Broker tips: Hammerson, Tesco, Imperial Brands

Goldman Sachs and Credit Suisse have passed judgement on Hammerson and its proposed takeover of Intu – but with diverging views of the shopping centre operator’s prospects.

The Goldman analysts, who already had a ‘buy’ rating on Hammerson, have added the company to their list of conviction shares. By contrast, Credit Suisse has downgraded Hammerson, which owns Birmingham's Bullring and Brent Cross in London, to ‘neutral’ and Intu to ‘underperform’ – both from ‘outperform’.

Julian Livingston-Booth and his team at Goldman argued in a note dated 14 March that Hammerson and Intu’s share prices were based on a too-gloomy view of the UK retail environment.

Hammerson’s annual results demonstrated its resilient operational performance and gave more information about potential merger synergies, the Goldman team said. Combining with Intu will give Hammerson greater scale for investment, the knowledge and relationships of both businesses and the ability to attract the best retailers, they said.

Hammerson’s shares, down 25% in the past year, fell out of the FTSE 100 index in February. The shares fell 5.5% to 431.5p at 12:27 GMT.

Tesco is a visible turnaround story and the retailer will increasingly be viewed as a capital return stock, JP Morgan analysts said as they rated the shares 'overweight'.

The supermarket chain's recent acquisition of Booker is transformational because it gives Tesco a bigger market to aim at, more than £6bn of revenue capacity and a better mix of formats as shoppers opt for online and convenience, the analysts said. In addition to £200m of synergies, Tesco has secured the execution abilities of Charles Wilson, Booker’s former boss who has taken over as head of Tesco’s UK business.

The Booker deal, which is not reflected in consensus estimates, will allow Tesco to generate £4.4bn of free cash flow and reduce its net debt by £2.2bn by 2020, JP Morgan said. A quarter, or £1.1bn, of the free cash flow will be returned to shareholders in dividends, they predicted.

For this reason, investors will shift their attention to Tesco’s cash generation and ability to return capital and away from its trading potential, the analysts said. They gave Tesco a 265p price target compared with 210p at the time of publication.

Goldman Sachs downgraded Imperial Brands to 'neutral' from 'buy' and cut its 12-month price target to 2,760p from 3,610p as it removed the stock from its Pan-Europe 'conviction list' as its thesis - based on a return to organic revenue growth - has failed to materialise.

It said the shares have disappointed, falling 30% since being added to the buy list in April 2016. Over the same period, meanwhile, the FTSE World Europe returned 23%.

Management’s efforts over the past five years to consolidate, simplify and invest in the company’s brand portfolio have stemmed market share losses, but were not enough to compensate for the deteriorating trends across its key cigarette markets, it said.

"Despite a successful stabilisation of market share across key geographies, organic revenue growth for IMB failed to recover as we had expected, reflecting worsening trends across cigarette markets. Uncertainty over the disruptive effects from next-generation products and regulation have also weighed on the stock, as has a loss of investor confidence on potential consolidation activity involving IMB."