Broker tips: Imagination Technologies, M&S, Anglo American

Imagination Technologies surged on Friday after N+1 Singer upgraded the stock to ‘buy’ from ‘hold’ and lifted the price target to 191p from 151p following a visit to the company’s headquarters in Kings Langley.

In its last note, N+1 outlined a scenario where the group reduced research and development costs by a further £8.5m. It said on Friday that this scenario looked increasingly likely, hence the upgrade.

“Post the visit we remain convinced that the group’s core platforms are well aligned with the emerging trends in the industry,” the brokerage said.

N+1 Singer reckons the current trading environment will continue to be tough, but given the strength of the group’s unique intellectual property, it said any material weakness in the share price could bring potential bidders for the company out of the woodwork.

It said Imagination was a highly attractive asset and expects any bid to be higher than its new target price.

“We believe the group’s IP has significant strategic value and that the new executive team is committed to maximising shareholder value.”

Bank of America Merrill Lynch downgraded Marks & Spencer to ‘underperform’ from ‘neutral’ and slashed the price target to 385p from 480p saying a recovery in apparel remains elusive.

The bank downgraded its full year 2017 and 2018 earnings per share estimates by 5%, putting it 7% below consensus. This is based on the continued decline in like-for-like growth in the General Merchandise division and lower gross margin improvement.

Merrill reckons trading remained relatively subdued in the fourth quarter, especially in GM, and forecasts LFL sales growth of -2.8% in that division in Q4, with continued market share losses.

The bank said it expects new CEO Steve Rowe to give an honest assessment of the state of the company in May.

“In terms of opex, we see less flexibility to manage opex more aggressively next year, given the introduction of the national living wage in April 2016, and M&S’s need to pay its staff more competitively.”

Execution needs to be improved in many areas across the supply chain such as design and availability, and price points are out of kilter in some areas, especially across the core ranges, Merrill said.

It said that while the dividend yield of around 4.5% provides some support, there is limited scope for growth and Merrill sees better investment opportunities in the sector.

Exane BNP Paribas downgraded Anglo American to ‘underperform’ from ‘neutral’ on valuation grounds and to reflect challenges associated with restructuring plans.

It also downgraded South32 and Antofagasta to ‘neutral’ from ‘outperform’, both on vauation grounds.

The bank said sentiment on Anglo has changed drastically over the past month, with the shares more than doubling since their 20 January low.

“The market had probably priced excessive fears at the end of FY15; commodity prices have now stabilised and the group has partly reassured on its ability to avoid burning cash this year,” Exane said.

Nevertheless, it reckons the shares have now run ahead of what the group can deliver short term while significant headwinds remain, with current iron ore and platinum prices at odds whit fundamentals.

In addition, it said restructuring remains a challenge and there is a risk the company will disappoint on disposals again this year.

As far as Antofagasta is concerned, it said copper prices hold long-term upside and the company is well positioned with its low cost assets and strong balance sheets.

“However, we believe these features are now fully discounted after the recent bounce in the shares (+53% from January lows).”

The bank has a 430p price target on Anglo and 580p on Antofagasta.

Exane downgraded South32 but lifted the price target to 75p from 70p, saying it was a genuine restructuring story but this was priced in.

“We still like the combination of the strongest balance sheet and operating leverage, and the stock still displays a c10% free cash flow yield in FY16e and FY17e (7.4% at m-to-m). However, the stock is up 47% year-to-date and has outperformed the sector by over 20%.”