Broker tips: JD Sports, Premier Oil, AstraZeneca

RBC Capital Markets downgraded its stance in shares of JD Sports to ‘underperform’ from ‘sector perform’ on Monday as it argued that "strong recovery prospects are less certain".

The bank, which also upped its price target on the group to 625p from 570p, said JD Sports has a strong track record and management team. However, its longer-term margin recovery prospects may be compromised by a shift in customer shopping patterns and to online.

In addition, it said the stock’s valuation already largely reflects a strong v-shaped recovery, hence its decision to adopt a more cautious stance on the shares.

RBC said it has seen some encouraging signs in terms of customer willingness to return to stores, with conversion up and likely some pent up demand to come through in the UK. It noted that in the UK, JD has a roughly 50:50 split between malls and high streets so is well hedged for customers choosing to shop locally.

It also argued that a shift to online will make it harder for JD to get back to historic margins, given the ease of switching to branded websites and the higher fixed cost base of JD's stores.

"On the one hand fashion is a high priority purchase for many younger customers and we expect the strong casual/athleisure trend to continue. However, we also expect more employment pressures from later this year to affect the earning power of younger shoppers."

Analysts at Berenberg slightly raised their target price on exploration and production group Premier Oil from 30.0p to 40.0p on Monday, stating revised terms to the firm's proposed acquisition of assets from BP would benefit the company's overall net asset value.

Following confirmation of the revised terms for Premier Oil's acquisition of the Andrew Area and Shearwater assets from BP, Berenberg adjusted its valuation to highlight the net asset value impact of the deal completing.

Berenberg estimates that, if the acquisition of the Andrew Area and Shearwater assets from BP is completed, Premier's core net asset value at 1 January 2021 would increase from $174m to around $710m - a 310% uplift.

However, the German bank said this assumes that the $210m cash payment on completion was offset by the recent issue to Asia Research and Capital Management (ARCM) and a subsequent $185m equity raise.

"Upside exists both in the development portfolio and in the equity pricing, but our cautious approach reflects the steps still required to complete the deal – notably creditor and shareholder approval, and the equity raise itself."

JP Morgan has reiterated its ‘overweight’ rating on AstraZeneca, following reports that the drugs manufacturer was mulling a possible merger with US rival Gilead Sciences.

The UK's biggest company by market value reportedly contact Gilead in May, according to Bloomberg, with a view to creating $240bn drugs giant. Both companies are currently focusing on Covid-19 treatments, with AstraZeneca working alongside Oxford University on a vaccine.

JP Morgan said it found AstraZeneca’s overture surprising, “giving Gilead’s weaker growth outlook – 3% 2021-24 earnings per share compound annual growth rate versus AstraZeneca at an 18% CAGR – limited pipeline, and the apparent lack of significant synergies, giving the limited therapeutic overlap”.

The bank also argued there was a “low probability” of a deal happening, with potential barriers including the US government being reluctant to see Gilead acquired by a foreign company and possible shareholder resistance.

However, it conceded that should a deal go through, it would bolster AstraZeneca’s earnings.

“We calculate this would be highly accretive to Astra earnings in the medium-term, with around 50% core EPS accretion in 2021, 40% accretion in 2022, accretion in the 20s in 2023-25.

“In addition, to the EPS accretion, depending on the offer structure, the deal could also allow Astra to de-lever, which in turn could provide more room for pipeline in-licensing.”