Broker tips: Merlin Entertainments, Hikma Pharma, Premier Oil, Kaz Minerals
Shares in Merlin Entertainments are only worth 375p and should be sold, said Berenberg on Thursday, downgrading its rating on the Legoland and Madame Tussauds owner.
With the stock closing at 497p the day before, analyst Owen Shirley in London moved to a 'sell' recommendation from his previous 'hold' due to a feeling that investor patience is wearing thin and that "Merlin is potentially one misstep away from triggering a material de-rating".
Results two weeks ago showed its largest division, Midway, recorded a constant-currency EBIT decline of 10% in 2016 and Shirley calculated that, on a same-site basis, visitation has been declining for the last three years.
Although management blamed weak holiday visitation to the UK for the weak performance in the first nine months of 2016, despite a material improvement in the final quarter, Midway achieved a "negligible" improvement in like-for-like sales.
"Even more of a concern is the fact that Merlin’s ability to offset declining visitation with pricing appears to be diminishing."
What's more, hitherto-exceptional Legoland has seen LFL growth decelerate and turn negative against tough previous year comparisons.
Despite the release of 'Lego Batman Movie' and 'Lego Ninjago: Masters of Spinjitzu' in 2017, Berenberg cut its LFL estimate to 5% growth this year from 7% and cautioned that downside risk into the first quarter "is significant, with only California, Malaysia and the struggling Florida park contributing for most of the period".
With capital expenditure being bumped up, free cash flow yield is only forecast to be a lowly 0.4%
Hikma Pharmaceuticals
JP Morgan Cazenove downgraded Hikma Pharmaceuticals to ‘neutral’ as it expects the company's new asthma drug to have a short term impact.
The bank downgraded the FTSE 100 company to ‘neutral’ from ‘overweight’ but raised it price target to 2,400p from 2,100p after a review of its generic version of the asthma drug Advair, which is forecast to add about 7% growth to earnings per share in 2018, however a more rapid erosion is excepted from 2019 onward.
JP Morgan took a more cautious long-term view as it expects continued pricing pressure and likely further generic entrants into a category with modest growth, so its sees the contribution by Advair declining after 2018.
The downgrade came despite Hikma reporting a set of first half results that beat expectations, although it did post guidance for this year that needed a 5% reduction to 2017 consensus.
With Hikma’s shares up 20% for the year to date against the FTSE 100’s growth of 3% and the Stoxx Europe 600 healthcare index’s growth of 5%, the bank believes that this includes a market approval of Adavir.
Even on its upgraded 2018 earnings per share, assuming the launch of the drug will definitely go ahead later this year, Hikma now trades on 15 times the 2018 price-earnings ratio.
“We see this multiple offering limited room for further re-rating, with generic Advair being a finite opportunity, and with limited visibility on the long-term growth rate.”
Premier Oil
Premier Oil gushed higher for the second day in a row on Thursday as Peel Hunt initiated coverage of the stock with a ‘buy’ rating.
On Wednesday, Premier shares surged after it said it had secured the final lock-up for its refinancing bid.
The brokerage said that with Premier now expected to complete its refinancing in the short term, the focus can shift to delivering value to shareholders through growth and debt reduction.
Peel said that securing extended maturities and covenants will enable Premier to invest in development-led growth while reducing net debt, with its modelling suggesting a reduction of 10% to $2.5bn by the end of 2020.
“The portfolio provides flexibility to outperform our forecasts and we see potential for a share price re-rating as rising production and falling opex are reflected in improved cash flows. We also flag near-term exploration upside.”
Peel Hunt recognised that Premier remains highly geared and therefore the share price remains sensitive to further oil price weakness, however it set its target price at 90p, representing 40% upside to the current price.
Kaz Minerals
Shares in Kaz Minerals jumped on Thursday as JP Morgan Cazenove upgraded the stock to 'overweight' from ‘neutral’ and lifted the price target to 580p from 465p as it took a look at the metals and mining sector.
The bank said it had been cautious on the stock due to risks around the construction of development projects and balance sheet vulnerability in the event of a commodity price downturn.
“However, operational/project performance has exceeded expectations, while commodity prices have reduced balance sheet risk. Given those factors, coupled with an almost 20% pullback in the shares since mid-Feb, we now see an attractive entry point and upgrade.”
Meanwhile, JPM said Randgold Resources and Acacia Mining - both rated ‘overweight’ - remain its top picks in the precious metals sector. It said Randgold is “optically expensive” trading at 10/9x EV/EBITDA on spot, but is also net cash.
In addition, it pointed out that management has strict thresholds for M&A/project development and has outlined plans to return cash above $500m to shareholders.
As far as Acacia is concerned, it highlighted the fact the company generates free cash flow yield of around 7-8%, which is the highest among the UK precious peers, providing strategic flexibility. Still, JPM acknowledged near-term risks regarding the Tanzanian concentrate export ban.
Petra Diamonds, rated ‘overweight’, remains JPM’s top diamonds pick. It reckons the stock will re-rate over the medium term based on solid production growth and improving product mix and margin expansion as the proportion of undiluted ore increases.