Broker tips: Mitie, Electrocomponents, Anglo American
RBC Capital Markets downgraded outsourcing company Mitie ‘underperform’ from ‘sector perform’ and cut the price target to 160p from 195p ahead of first-half results.
“We already know H1 will not be good. However, the key question is whether the trading and outlook has improved.
“In our view (and given recent market developments), it is difficult to foresee any real improvement. Ahead of the new CEO being introduced to the market, we therefore make a pre-emptive cut to both forecasts and dividends and move to underperform.”
The Canadian bank highlighted the fact that the outlook for UK outsourcers has deteriorated significantly in the last 12 months, with clients looking to transfer more risk to the service provider and margin pressure growing.
“Mitie has already warned, Capita has since followed suit and in our view, it is only a matter of time before this sector is once again under scrutiny for the wrong reasons.”
As far as expectations for the first-half numbers are concerned, RBC said revenue is likely to be modestly lower than last year, down 2.5%, while operating profit is likely to be at least 20% lower due to the absence of higher margin work and discretionary spend, and general pricing pressure.
Back in September, Mitie shares tumbled after it issued a surprise profit warning, cutting its profit outlook following the Brexit vote and due to other economic pressures.
HSBC upgraded Electrocomponents to ‘buy’ from ‘hold’ and lifted the price target to 430p from 240p as it pointed to the self-help story.
The bank pointed out that investor sentiment towards the company has shifted.
“A company that had been perceived as being doomed to dwindling returns, retreating from internet competition, has become a self-help story. Electrocomponents has refocused its product offering, restructured its cost base, simplified its discounts structure, and addressed its purchasing.”
As a result, the group is now less exposed to currency fluctuations and is striving to buy cheaper, hold for less and sell at a better price, HSBC said.
“This requires a sharp focus on what the customer wants, and meeting those demands. The success thus far is impressive, necessitating that we increase our numbers.”
The bank upped its pre-tax profit estimate for 2018 by 24% to £128m.
HSBC said that given Electrocomponents has years of under-trading to reverse, as long as the economy is supportive, it can continue to improve.
Goldman Sachs upgraded Anglo American to ‘buy’ from ‘sell’ and upped the price target to 1,400p from 400p.
The bank said it might seem odd to upgrade the stock after its 280%+ year-to-date share price rise.
However, it pointed to deleveraging, increased US pending and higher diamond demand.
GS said the free cash flow lift provided by higher commodity prices should see significant deleveraging. In addition, it said inflation and increased confidence in the US economy should see growing consumer spending on luxury items, leading to an increase in diamond purchases.
“This would be a big positive for Anglo as diamonds account for more than 20% of its 2017E earnings before interest, taxes, depreciation and amortisation."
Goldman said metallurgical coal and thermal coal have seen big price increases year-to-date. While the Chinese government has taken action on thermal coal no action has been taken on metallurgical coal, which represents more than 25% of Anglo’s 2017E EBITDA.
The bank reckons consensus is still not pricing in the full impact of commodity prices for this year and 2017, which could prompt a wave of upgrade.
As far as the stock’s valuation is concerned, it pointed out that Anglo is trading at a significant discount to its historical average and to peers.
GS said the much higher price target is a function of higher commodity price forecast for the next couple of years, significant FCF generation and a weaker GBP/USD rate.