Broker tips: M&S, Domino’s Pizza, Debenhams, Glencore, South32 and Rio Tinto

Retailer Marks & Spencer got a boost as Barclays initiated coverage of the stock at ‘overweight' with a 410p price target, which implies 14% potential upside.

The bank acknowledged that like the rest of the UK general retail sector, M&S currently faces some significant headwinds given weakening consumer sentiment and FX pressures on input prices, especially in the demand-elastic Clothing & Home segment.

However, it highlighted the fact that M&S Food has a good track record over many years, noting that the company is becoming increasingly food-focused over time. In addition, Barclays said it sees plenty of opportunity to add more stores, 200 in the next two years on a base of around 600.

It also pointed out that recent stores have been performing well with sales in new stores 17% ahead of plan at the 1H16/17 stage.

Barclays said that in Clothing & Home, the turnaround plan is likely to offset headwinds.

“M&S cannot avoid the industry headwinds although its older and wealthier customer base might give it some protection.

“However, the new CEO has outlined a comprehensive and sensible plan to improve its store estate and its product offering. Initial results appear encouraging with M&S delivering its first full price market share gains in over five years.”

Domino’s Pizza

Peel Hunt upgraded Domino’s Pizza to ‘buy’ from ‘hold’ following recent weakness.

“Domino’s has generated a 23% profit before tax compound annual growth rate and a 25% earnings CAGR over the last 14 years. We believe the company’s long-term investment case is intact, and offers increasing competitive advantages as well as the potential for forecast upgrades over the medium term.”

The brokerage noted that like-for-like sales slowed to 1.5% in January-February 2017 versus a 14-year historic average of 8.8%, causing the shares to de-rate to around 21x P/E, 2011-13’s level.

“We view this is as being unfair. Since 2013, franchisee profits per store have risen by 60%; the UK expansion rate has increased by 62%; and the overseas operations have moved from a £7.6m loss to a forecast profit in 2017E.”

Peel Hunt said that management stated at its conference that it expects LFL sales to recover to 5-6% and the brokerage agrees. It said sales should pick up as a result of Domino’s stepping up its promotional/advertising activity and improving the functionality of its app, which has been downloaded around 15m times, before considering the benefit of easy comps in the second half of the year.

The brokerage said its pre-tax profit forecasts are slightly above consensus simply as its numbers factor in the company’s investment and expansion plans for The Nordics. However, it reckons there is at least a further 3% EPS forecast upside in 2017E from UK margin growth, and 1% EPS forecast upside in 2017E from possible additional share buy backs.

Peel has a 400p price target on Domino’s.

Debenhams

Deutsche Bank upgraded retailer Debenhams to ‘hold’ from ‘sell’ as it cut the price target to 50p from 52p.

The bank said Debenhams faces many challenges, including a long-lease property portfolio, a weak apparel market with online channel shift, a recovering competitor, adverse margin pressures and limited scope to save costs.

In addition, it pointed out that the group is operationally and financially leveraged in an uncertain consumer environment.

Still, DB said that while Thursday’s strategy update did not answer many questions, it kick-started a range of trials which may bear fruit in the future.

“Though capex guidance was raised, the most important thing today was the protection of the dividend,” it said, adding that yielding more than 6%, a peak level, limits the downside after Thursday’s share price drop and the 7.5% decline year-to-date.

On Thursday, Debenhams' new chief executive Sergio Bucher unveiled his strategic vision for growing the department store group, centred around making the stores a more enjoyable destination for 'social shopping' and driving efficiency through 'simplifying and focusing' the business.

Interim results, reported alongside this strategic update, were unexceptional but in line with expectations, with UK like-for-like sales rose 0.5% and gross transactions up 2.9% to £1.7bn.

Profit before tax fell 6.4% to £87.8m and earnings per share dropped 6.5% to 5.8p. The interim dividend was held flat at 1.025p per share.

At 1020 BST, the shares were down 0.2% to 52.40p.

Glencore, South32 and Rio Tinto

Analysts at Barclays sounded a positive note on the EU mining sector, flagging the potential for large cash returns from Glencore, South32 and Rio Tinto over the medium-term.

Critically, the broker believes the best part of the iron ore price slide is now past.

Hence, the "vicious mini down-cycle" in Chinese steel and iron ore prices has opened up an interesting opportunity in the space.

China's economy was still solid, supply discipline is generally holding despite the higher prices and sector valuations are still compelling, analysts Amos Fletcher and Ian Rossouw said in a research note sent to clients.

They highlight how spot free cash flow yields are at 14% and 16% for 2017 and 2018, which together with strong balance sheets meant the majority of those monies would be funelled into cash returns.

On their estimates, their favoured names, Glencore, S32 and Rio Tinto were capable of returning the equivalent of 63%, 62% and 39% of their market capitalisation, respectively, over the coming four years without breaching their gearing targets.

"We remain positive on the EU mining sector."