Broker tips: Morrisons, BHP
Morrisons could benefit from the merger of Sainsbury's and Asda, Citi analysts believe, leading them to upgrade their rating on the Bradford-based supermarket group.
Citi's "base case" forecasts the Sasda merger to drive almost 60% pro-forma earnings per share accretion for Sainsbury's, but synergies are expected to be "tempered" by a predicted remedy process from the competition regulator of around 200 store disposals.
This provides a potential opportunity for both Morrisons and Tesco to acquire stores, Morrisons "benefiting from more opportunity and from a lower base".
A "mid-case" remedy scenario sees Morrisons potentially buy between 48 and 108 remedy stores, with a mid-case of 78 stores representing 20% of existing selling space.
Assuming Morrisons takes on additional costs and achieves up to 1% synergies, this mid-case scenario drives circa 30% pro forma EPS accretion, before any reinvestment into the offer.
"While we view Sainsbury’s shares as offering the best risk/reward from the potential merger, we recognize the benefit which might also accrue to Morrison’s," the analysts said, accordingly upgrading their rating to 'neutral' with a 255p target price.
JP Morgan Cazenove downgraded its rating on BHP Billiton, arguing that the blue-chip miner is too expensive compared to its peers.
In a note published on Monday on metals and mining, the bank said: “BHP stands out as the only diversified [miner] valued in line with its historical multiples.
“Though we expect BHP will follow Rio Tinto in raising shareholder returns, it has inferior balance sheet capacity over the medium term, in our view, due to likely petroleum ‘capex creep’ and a less defensive balance sheet.”
JP Morgan added that BHP "screens expensive" after outperforming fellow FTSE 100 miner Rio by 12% since January 2018, and was now "the only diversified not trading at a substantial discount versus its late cycle average multiple".
It has, therefore, cut its rating on BHP to ‘underweight’ from ‘neutral’, with a share price target of £19.50. It reiterated its ‘overweight’ ratings on Rio and Anglo American.
JP Morgan also argued that the 15% increase in iron ore prices since the dam collapse at the Feijao mining complex in Brumdinho, Brazil last month was “over-extended” as it believed only around 8m tonnes of output would be lost by Vale in 2019. Vale, one of the world’s biggest iron ore producers, said last week it would temporarily reduce annual production as it replaced dams across Brazil.
JP Morgan did concede, however, that supply would still be “tighter and more vulnerable” and raised its iron ore forecasts for 2019 by 10%, to $70 a ton, and by 6% to $65 ton in 2020.