Broker tips: IAG, Antofagasta, Ryanair

Societe Generale downgraded its stance on British Airways and Iberia parent International Consolidated Airlines to ‘hold’ from ‘buy’ and cut the price target to 420p from 500p.

The bank said that while IAG has built a strong track record over recent years, over-delivering on cost-cutting and synergies, the market overestimates its earnings generation capabilities and the transatlantic market is becoming more competitive.

SocGen said it was cutting its earnings forecasts, mainly on the back of ongoing sterling weakness.

In addition, it highlighted "several worrying developments over recent months”, including uncertainty about the prospects for the British economy following the Brexit vote in June.

SocGen pointed out that British Airways contributes almost 75% of group profit. “The transatlantic market is becoming more competitive, as non-alliance carriers are expanding aggressively. And, most importantly, weak sterling will impair BA’s profitability (as the fuel bill is paid in US dollars) and will, on top, have a (translation) effect on group profits reported in euros,” it said.

The French bank also argued that the market forecast of flat earnings in full-year 2017 looks unrealistic. “We expect underlying margin pressure at BA, and unless the pound massively recovers from here, the translation effect will definitely weigh on earnings. Recall that IAG issued a profit warning on the day after the Brexit vote. Effects in its underlying business were not visible yet on that day, but the pound had fallen some 10%.”

UBS upgraded Antofagasta, a Chilean copper mining company, from ‘sell’ to ‘neutral’ even after the company released a weaker than expected production target for fiscal year 2017, albeit at the same time lowering the price target from 520p to 500p.

“After the release of weaker than expected FY17 production guidance we do not see material negative stock-specific catalysts on the horizon and believe the near-term copper price outlook is balanced,” said UBS analyst Daniel Major.

The expensive valuation alone is no longer enough to warrant a ‘sell’ rating following the shares significant underperformance in fiscal year 2016 and the lack of ‘clean’ copper plays.

Year-to-date stock in Antofagasta fell 12% versus a 35% gain for Bloomberg´s mining index, Major pointed out.

Major believed that the company faced structural changes from grade decline and ore hardness at Los Pelambres, but said the market was becoming increasingly aware of these challenges.

Disappointing full-year guidance for 2017 production and capital expenditures highlights the continued structural medium-term issues that the company and the Chilean copper industry face. After incorporating new guidance, the analyst downgraded his earnings estimate for 2017 and projected negative free cash flow (FCF) for the miner.

He also saw "modest" downside risk to the full-year 2016 production guidance of 710 kilotons (kt), which may be offset by slightly lower net cash costs.

Copper has materially underperformed the major mined commodities in the full year 2016 with robust demand growth offset by stronger-than-expected supply growth, mostly due to fewer disruptions. Looking into 2017 supply growth is set to slow and the analysts expect demand to remain stable. Supply constraints are likely to drive deficits and higher prices in the medium-term.

The Swiss broker trimmed its net present value (NPV) estimate for the company´s cash flows by approximately 5% to reflect weaker guidance.

Nonetheless, for those looking for leverage to copper price upside the analyst expressed his preference for Glencore and KAZ Minerals.

JP Morgan Cazenove on Thursday said Ryanair remains its “top pick” of European airlines as it took a look at the sector.

The bank reiterated an ‘overweight’ rating on the budget airline and lifted its target price to €15.25 from €14.25.

Wizz Air is JP Morgan’s second choice of airlines. Its rating was also left at ‘overweight’ and its target price raised to 2,075p from 1,950p.

“Both stocks are rated ‘overweight’ given long-term potential to expand market share on the back of industry leading unit cost performance,” JP Morgan said.

“While we project greater absolute upside potential for Wizz, progress is presently challenged by restrictions on expansion of non-EU holdings. It also faces a relative fuel cost headwind and potentially expanded focus from Ryan Air in Eastern Europe.”

On International Airlines Group, owner of British Airways, JP Morgan said it is one of the most exposed airlines to the Brexit vote. It recommended an ‘underweight’ rating and cut the target price to €5.00 from €5.60 on its shares traded on the Bolsa de Madrid exchange.

However, JP Morgan said it emphasises IAG’s greater gearing to UK corporate activity and higher mix of non-UK point of sale. It also believes the airline is one the biggest beneficiaries of fuel costs falling to an average 13% in the coming year.