Broker tips: Imperial Brands, Babcock, Anglo American

Analysts at BofA Securities maintained their 'buy' recommendation for shares of Imperial Brands following the tobacco giant's "supportive" pre-close trading update.

"We think Imperial Brands can unlock significant value by pulling the right levers by refocusing its Tobacco business, stepping up support behind Heat Not Burn and delivering efficient capital allocation," they said in a research note sent to clients.

They did concede that execution risks remained but trading on seven times their estimates for calendar year 2022 earnings per share and sporting an 8% dividend yield, they believed the risks for the share price lay to the upside.

Regarding the company's announcement of a £1bn share buyback, they noted Imperial Brands's statement that it was expected to be an ongoing multi-year feature thanks to the decline in leverage to the lower end of the company's target range.

They also welcomed the improved market share in Imperial's Top 5 markets for combustibles.

Similarly, market share gains for Heat Not Burn in Greece and the Czech Republic - together with the launch in Italy - were deemed "encouraging", the same as the positive trial results for blu 2.0 in France.

Nonetheless, they went on to add that "we would like to see much more tangible progress on reduced risk products."

BofA's target price of 2,400.0p per share was unchanged.

Analysts at Barclays reiterated their 'equalweight' recommendation on shares of aerospace, defence and nuclear engineer Babcock, but trimmed their target price to 325.0p on lower free cash flow.

In their view, there were four main drivers of the shares' absolute 13% underperformance versus UK Defence peers year-to-date, which on average had jumped by over 40%.

The first of those was the company's indexation as a Support Services outfit, which meant that investors were failing to see the company as a defence conflict beneficiary over the short to medium-term.

Secondly, investors had sought refuge in value defensives for their near-term visibility on earnings and cash.

But Babcock was more exposed to wage inflation, had an average contract duration of five years and was negative to negative free cash-flow for 2023.

Thirdly, higher interest rates and worries around future costs had hit FTSE-250 stocks with leverage higher than their sector peers more.

On Barclays's estimates, Babcock was trading on 1.7 times' estimated net debt-to-earnings before interest, taxes, depreciation and amortisation.

Last, there was a preference within the sector for company's making money in US dollars, whereas only 5% of Babcock's sales were in US dollars.

Babcock was due to issue its half year figures on 18 November.

Analysts at Berenberg downgraded their recommendation for shares of Anglo American from 'buy' to 'hold', citing "poor operational delivery" and macroeconomic headwinds.

That was expected to weigh on the share price until one or both of those factors improved.

On the operational side of things, they highlighted the problems with metallurgical coal, production for which was running at a third of annualised guidance at the half year point chiefly due to "lacklustre" performance at its Moranbah North mine in Australia due to recent safety issues.

The result was that they now saw downside risks to Anglo's full-year guidance at Moranbah.

Regarding the economic outlook, the slowdown in the global economy, due to elevated inflation, coupled with the deterioration of relations between the West on the one hand and Russia and China on the other, were expected to create "a number of material headwinds" for the mining sector.

They conceded that sentiment might be buoyed in the near-term by the announcement of Chinese stimulus around the data of the next party congress on 16 October, but they expected the recessionary narrative to outweigh the positive impact from stimulus.

Hence their recommendation to sell into strength.

The analysts also trimmed their target price on the shares from 3,200p to 3,000p.

Anglo American was scheduled to report on third quarter production on 27 October.