Broker tips: Kingfisher, Pets at Home, Rio Tinto, CAB Payments

JPMorgan Cazenove reiterated its 'underweight' rating and 200.0p target price on B&Q owner Kingfisher on Tuesday as it placed the shares on 'negative catalyst watch' ahead of its third-quarter trading update next month.

The bank argued that a deterioration in the French outlook leaves Kingfisher - which also owns Castorama and Brico Depot in France - too reliant on UK strength.

"We remain of the view that cons FY 25 forecasts for both the UK and France are over ambitious (we sit circa 10% below cons on FY 25 profit before tax), particularly with the latter seeing signs of a weakening consumer," the analysts said.

JPM pointed out that results from a September 2023 survey showed a "significant" worsening in the outlook for French DIY spend, with the net balance falling to -22% from only -1% in March.

It said that while longer mortgages in France provide some protection in a rising rates environment, housing starts and new mortgages have nevertheless materially deteriorated, now 29% and 43% below pre-pandemic levels.

"In addition to KGF witnessing a slight slowdown in Aug/Sep, homewares retailer, Maisons du Monde, profit warned this month, referencing a 'strongly deteriorating trend'," said JPM. "This followed a warning from clothing retailer, SMCP, in September, which had seen a deterioration since the end of July."

Shore Capital has slashed its rating on pet supplies retailer Pets at Home from 'buy' to 'hold' due to operational challenges and the ongoing regulatory investigation of its vet business.

In its second quarter, the company experienced operational issues related to the implementation of its new distribution centre. Shore Capital said this led to lower product availability in stores for a six-week period from early August to mid-September, resulting in "noticeable gaps" on retail shelves.

Meanwhile, the Competition and Markets Authority announced in September that it was looking into "how veterinary services are bought and sold amid concerns that pet owners may not be getting a good deal or receiving the information they need to make good choices".

Pets at Home was confident of its business model and was actively engaged with the CMA, already implementing many of the possible measures such as transparency in pricing. However, ShoreCap thinks the ongoing CMA investigation has created some uncertainty among investors.

While both issues may not have a material impact on the company, they do "exacerbate" valuation concerns that the broker has on the stock, with the shares trading at 15 times earnings - the top end of the UK retail sector.

"This valuation suggests that the market is pricing in flawless execution, an assumption we find increasingly difficult to justify given the recent operational issues in Q2. Furthermore, the ongoing review by the CMA concerning the vet business introduces an additional layer of uncertainty to the stock's outlook," said ShoreCap.

Barclays has upgraded mining group Rio Tinto from 'neutral' to 'overweight' after taking a more positive view on iron ore.

After a week spent in China, with over 20 meetings with local miners, traders, developers and economists, Barclays said the industry "remains resilient".

"More pain looks set to come in the real estate market, but manufacturing has surprised to the upside. We become more positive on pig iron output into 2024, which can support iron ore prices," the bank said.

Barclays kept its 6,300.0p target price for the stock unchanged.

Analysts at Canaccord Genuity slashed their target price on payment processing and foreign exchange business CAB Payments from 585.0p to 246.0p on Tuesday after the group's "surprise and significant" negative trading update.

The company, which only debuted on the London Stock Exchange a few months ago, said total group revenue rose 10% on the quarter in Q3 to £105.5m. However, in recent weeks there have been a number of changes to the market conditions in some key currency corridors, on top of the ongoing uncertainties surrounding the Naira, which are impacting both volumes and margins.

Canaccord Genuity said it had been "surprised by the rapid turn of events" and noted that, in reality, it appears difficult to forecast future revenues with any degree of certainty.

"The medium- and long-term growth opportunities will be balanced by the speed at which trading appears to have deteriorated. Consequently, we believe investors are more likely to err on the side of caution with respect to short- and medium-term expectations," said Canaccord.

The Canadian bank, which rolled forward its target date to 2024 and cut the stock to 'speculative buy' from 'buy', said it now values CAB at a 10% discount to the sector average enterprise value/EBITDA and price-to-earnings multiples, noting that the global FX and payments sector has de-rated by roughly 20% since August.