Broker tips: Hansteen, Mondi, Weir

JP Morgan Cazenove has initiated coverage of property investor Hansteen with a ‘neutral’ rating and target price of 125p.

The investment bank said it expects Hansteen to benefit from stable property values and rents along with the recent weakness in the pound. JP Morgan predicts a £250m uplift due to lower sterling against the euro.

The pound, the acquisition of minority stakes and debt refinancing drive JP Morgan’s 2016 estimate for earnings per share of 6.6p and adjusted net asset value of 128p.

While the bank expects 0.5% rental growth, it sees limited capital growth.

JP Morgan added: “In our view, current discounts of 13% to JP Morgan’s estimated fiscal year 2016 net asset value and 7% to gross asset value – versus historical discounts of 14% and 8%, respectively – are not cheap on an asset value basis.

“However, the combination of a 5.5% 2016 dividend yield and stable income outlook should support the shares.”

Hansteen held a diversified £1.7bn portfolio in the first half at a gross yield of 7.6%, comprising about 500 industrial assets, serving 5,270 tenants in the low-end to middle of the market with average annual rent of £39.9 per square metre (sqm) on a 10-year average and capital value of about £418 per sqm.

The average vacancy rate has been 15% over the past 10 years. Lease lengths are short at two to three years, and retention is high at about 80%.

JP Morgan said while the company offers an attractive dividend, the stock is fully valued on historical price to net asset value ratio.

JPMorgan Cazenove downgraded paper and packaging group Mondi to ‘neutral’ from ‘overweight’ following the company’s third-quarter numbers on Thursday.

The bank said that while the long-term investment case is intact, a lack of catalysts suggests there is no need to rush.

“Mondi remains a well-run company with a clear strategy and supportive balance sheet (M&A optionality, dividend yield 3% FY16e) and we ultimately expect it to benefit from strong cash flow generation and targeted internal capital investment,” JPM said.

“However, short term factors (forex, forestry gain comps) and a lack of near term catalysts (price hikes across main grades unlikely in next 3-6 months) lead us to become more cautious on the near-term upside.”

JPM said Mondi’s main currency exposures – the South African rand, the Russian roble and the Polish zloty – are volatile, making forecasting difficult.

However, it looks likely that the benefit over the next nine months could be weaker versus gains seen year-to-date.

“If these remain at spot into FY17 this would result in a negative €2m impact for FY17 - not much and forex may yet move in Mondi’s favour, but this looks unlikely to provide the same boost as in YTD FY16.”

UBS downgraded Weir to ‘neutral’ fro ‘buy’ but lifted the price target to 1,830p from 1,500p saying much of the positives are now priced into the stock.

The bank noted Weir is supported by a recovering oil price (and US rig count) as well as FX.

“The key driver is the oil & gas recovery, in our opinion, and we do expect a strong medium-term recovery. However, we are downgrading to neutral as a lot already looks to be in the price for this – our analysis suggests that around 60% growth in the oil & gas business sales is already being priced in.”

UBS said this is above its 2017-18 estimates, but to give context noted that it would only be around a third recovery towards the 2014 peak.

The Swiss bank upped its 2016 earnings per share estimate by 8% to 66.8p, its 2017 estimate by 12% to 77.2p and its 2018 forecast by 11% to 88.3p. It pointed to recent supportive FX moves and said it now assumed a stronger 2016 performance in Minerals, which has stabilised well in recent trading.

In addition, it assumes a slightly faster oil & gas recovery over 2017-18E given the more supportive oil price backdrop.