Broker tips: Home Retail, Britvic, AG Barr, Shell

Home Retail had its ‘sell’ rating reiterated by Canaccord Genuity on Tuesday after the company agreed on the terms of a takeover bid from J Sainsbury.

Sainsbury’s has offered £1.3bn for the owner of Argos, equivalent to 161.3p a share. Home Retail shareholders will receive 55p in cash and 0.321 Sainsbury’s shares for each of their Home shares.

Shareholders will also receive a payout of 25p per share to reflect the £200m capital return from the sale of Homebase and 2.8p in lieu of a final dividend in respect of the financial year ending 27 February.

“With the total all-in value of the offer some 20% below the 200p some shareholders were cited as looking for from the bidder, a level at which the shares were indeed trading a year ago, this therefore looks like a case of ‘possible’ capitulation in our view by Home Retail and its shareholders, especially as the Home Retail board ‘continues to believe in the prospects for the standalone company’,” said Numis analyst David Jeary.

“Given our fundamental valuation of 100p for Home Retail, this possible offer looks an attractive opportunity for Home's shareholders to cash in their chips. Relative to the 98.7p share price on 4 January, they will receive 82.8p in cash and an option via Sainsbury paper (78.5p) to maintain an interest in Home's future - albeit with exposure to the UK grocery sector and its current challenges.”

Numis kept its price target unchanged at 134p.

JP Morgan Cazenove has initiated coverage of soft drink companies Britvic and AG Barr at ‘underweight’ and ‘overweight’ respectively.

In a note on Tuesday, the investment bank said Britvic’s shares have outperformed the sector since 2013.

“The 2013 restructuring programme has largely been completed, the cost savings achieved and we expect EBITA growth (ex-acquisitions) to slow significantly to 2% p.a. in FY16E-FY17E vs. 14% EBITA CAGR in FY13-FY15.”

It said it expects lower incremental returns from the company’s British supply chain programme “as the low hanging fruit has been reaped”.

“It would be optimistic to assume that all of the benefit would be incremental, given the tough UK retail environment, in our view.”

JP Morgan Cazenove also believed Robinsons will require significant investment to regain its appeal to customers.

With AG Barr, the bank said it expects the company to outperform the market “as it over-indexes in the high growth on-the-go vs. the struggling grocery channel”.

It also highlighted that the company has strong brands in water and energy, but no brands in the challenging squash category – a sector Britvic has a presence in.

JP Morgan Cazenove set a target price of 650p for Britvic and 620p for AG Barr.

Citigroup upgraded Royal Dutch Shell to ‘buy’ from ‘neutral’ with an unchanged price target of 1,775p, after the oil major got the green light from both sets of shareholders for its merger with BG Group.

“Our upgrade reflects a belief that the sharp erosion of equity value can be restored, driven by the delivery of strong growth over the 2016-18 frame that should act to boost return on equity and free cash flow,” the bank said.

It said BG makes Shell more competitive in changing energy markets, increasing exposure to short-cycle capital.

With an implied 35% of deal value being effectively written off through Shell’s underperformance, the market looks to be starting with low expectations, the bank said.

“On our estimates, post dividends, Royal Dutch Shell will run a $13-15 B cash shortfall in 2016. A 5-year credit default swap of around 125 basis points looks to reflect a debt-rating cut to single-A, a rating that we believe RDS will need to defend. We do not see an impending risk of a cut to dividends.”