Broker tips: Mondi, Lonmin, Reckitt Benckiser

Mondi, the paper and packaging group, has been downgraded to 'sell' by Goldman Sachs after a strong run in the shares and "stretched" growth expectations.

Goldman said it saw 12% downside to shares in the FTSE 100 group, which was spun-off from miner Anglo American in July 2007, after a 41% price rise since the start of the 2015.

The US bank said it believed growth expectations were stretched, given Mondi's high exposure to kraftliner packaging and near-50% sales exposure to emerging markets.

On publication, Mondi trades at 8.9 times 2016 expected EV/EBITDA on 3% expected EBITDA growth in 2016, versus Goldman's packaging average of 12% and 7.4 times expected EV/EBITDA.

A new target price of 1,300p was set, down from the previous 1,380p.

Last month Mondi reported first half profits up 30% to €490m, following a boost in sales, with the London- and Johannesburg-listed company enjoying said like for like sales volumes were up across almost all European and international markets.

UBS upgraded Lonmin to ‘neutral’ from ‘sell’, saying the risk/reward is now balanced, with the shares down 84% in the past three months.

However, UBS, which cut its price target on the stock to 25p from 45p, said the outlook is still very uncertain.

It sees material upside from medium-term platinum group metals price increases and a renegotiation of debt, but material downside in the case of an equity issuance or business rescue.

The Swiss bank said that with around $470m of debt facilities expiring in the second half of next year, Lonmin is facing a period of tight liquidity and being forced to re-evaluate its capital structure in an attempt to fix this.

UBS detailed three potential options.

The first involves the successful renegotiation of the terms of debt without the need for an equity issuance. This would be the most positive equity outcome, said the bank, adding that this was unlikely given Lonmin is cash negative at spot prices.

The second is an equity issuance, which UBS said seems the most likely option.

Finally, it said if an equity issuance isn’t possible, entering business rescue, which is similar to Chapter 11 bankruptcy, would be a last resort.

Reckitt Benckiser got a boost after Exane BNP Paribas upgraded the stock to ‘outperform’ from ‘underperform’ and lifted its price target to 6,600p from 5,800p.

The bank said its ‘underperform’ rating had been based on the belief that Reckitt would struggle to execute material near-term M&A given a dearth of suitable available opportunities.

With it now over two years since the last meaningful acquisition, Exane claimed a “hollow victory”.

However, the bank said it materially underestimated the strength of organic growth in the health business. It said that alongside SCA, Reckitt is now the fastest-growing EU health and personal care major and this looks set to continue in the near term.

Exane said it sees increasing scope for mid-term M&A, more specifically for Pfizer.

The bank said Reckitt is effectively a company of two parts: a consumer health business and a conventional HPC business. While the former has always been viewed as a good business, given both recent organic trading and the digitisation driven change that is impacting mainstream HPC, Exane now reckons it is arguably one of the best businesses within HPC.

As such, it argues that Reckitt merits a high multiple. “We believe that around 24x price-to-earnings is not an unreasonable target P/E multiple for Reckitt.”