Broker tips: Kingfisher, Mitie, gold stocks

Societe Generale upgraded B&Q owner Kingfisher to ‘hold’ from ‘sell’ and lifted the price target to 359p from 333p following the company’s results on Wednesday.

The bank said some early signs of recovery in the French home improvement market, together with a weaker reporting currency (UK pound), make Kingfisher’s profit forecasts look better supported over the year ahead than they have been for a while.

“The UK trading outlook remains solid for the short term, although we will be on the alert for any post-April stamp duty change impact on the UK housing market as well as the ‘Brexit’ risk,” it said.

SocGen noted its earnings per share estimates have barely changed since November last year.

It said the weaker pound, above-the-line restructuring costs and a better-than-expected divisional profit outcome for the year to January 2016 have had a net neutral impact.

“As a collection of mostly mature operating companies in mainly ex-growth markets, Kingfisher has little choice but to seek product and operating synergies in order to enhance the margin.

“The aim of offering customers better-designed, more inspirational and lower priced product could be the single most beneficial outcome of the five-year ‘ONE Kingfisher’ plan, if it is achieved.”

However, SocGen said execution risks remain high and five years is a long time to wait for the full £500m P&L benefit.

Mitie Group’s ‘buy’ rating was reiterated by Canaccord Genuity despite the company warning that full year revenues will be below the current range of market expectations of £2.35bn.

The outsourcing firm said it has experienced revenue shortfalls in the second half of the year as some work has been delayed or cancelled due to increased economic pressures and uncertainty.

Still, Mitie has been managing its cost based and focusing on maintaining margins while continuing to invest for the long term, so profits will be in line with consensus forecasts of between £125m to £133m.

Canaccord said the stock “remains at discount to sector peers having been hindered by several years of weak earnings momentum”.

“A more cautious tone through full year 2017 may allow for a period of more steady delivery against expectations and the opportunity for the shares to re-rate.”

The broker cut its target price to 300p from 320p. It also said its forecasts for 2016 results were in line with the Mitie’s statement, resulting in an EPS reduction of 3%. Canaccord also moved expectations for 2017 earnings down by 8% to reflect the “likelihood of lower organic growth”.

“Whilst the space continues to present attractive opportunities, organic growth has been under some pressure in the latest reporting season and contracts continue to require a greater working capital commitment,” Canaccord added.

Goldman Sachs downgraded Gold Fields and Fresnillo as it took a look at gold producers, but kept its positive stance on AngloGold and Centamin, saying fully-covered dividends and sound balance sheets were a rarity in the mining sector.

It cut South Africa’s Gold Fields to ‘sell’ from ‘neutral’ saying the valuation was stretched following the recent rally in the shares.

It said that with South Deep potentially continuing to underperform and Australian mines nearing the end of life, Gold Fields is likely to need either significant capex to sustain the Australian mines or an acquisition – both of which could depress investor returns.

It cut London-listed Fresnillo to ‘sell’ from ‘buy’ to reflect the disappointing grade at the Fresnillo mine and the stock’s significant premium to both peers and its historical average.

“The Fresnillo mine continues to underperform on grade due to vein narrowing faster, natural decline in grade, and delay in infrastructure installation. Although the company is taking measures to counter the decline we see risks skewed to the downside.”

The bank kept its ‘buy’ rating on AngloGold andCentamin, although it removed the latter from its Conviction List after the recent rally.

It said the market under-appreciates Centamin’s low cost position and its ability to generate cash and potentially ramp up investor returns.

“Although we see limited imminent catalysts for the stock, we believe it still has another leg to move up as the market underappreciates its capacity to generate FCF from its low-cost asset, Sukari, and thus increase shareholder returns.”

Goldman was bullish on the sector in general. It noted gold has been one of the best performing commodities year-to-date in a risk-off market and given tightening financial conditions in the US, which have led market participants to scale back their rate hike expectations.

GS said gold stocks have already been through the pain of capex/cost cuts and balance sheet restructuring, whereas for industrials, the process is just beginning.

“We believe gold equities (even after the recent stretch of outperformance) should continue to outperform.”