Broker tips: PZ Cussons, Tesco, Johnson Matthey

Shares in PZ Cussons were in the red on Thursday as Numis reiterated its ‘reduce’ rating after the company warned of difficult conditions in its main market of Nigeria.

In an update for 27 January to 13 April, Cussons said overall trading has been in line with expectations and the company is on track for the full year but cautioned on trading in Nigeria.

The Imperial Leather soap maker said the performance in Europe and Asia offset more difficult trading conditions in Africa. More specifically, in Nigeria, whilst the official naira exchange rate continues to be stable, a lack of availability at that rate is resulting in the majority of dollars being purchased at a premium of 50-70%.

The resultant cost impact is being managed through changes to relative pricing in an environment where trading conditions remain challenging and consumer disposable income is under pressure, the company said.

“Trading in Nigeria has been slightly worse than was expected in January and the repercussions of a lack of liquidity here will run on too into next full year,” according to Numis.

“We made very cautious estimates at the first half stage but have lowered pre-tax profit projections slightly more.”

Numis cut this full year’s pre-tax profit estimate from £101m to £100m and have lowered the following full year results by £1m. The broker left the target price unchanged at 262p.

Societe Generale downgraded Tesco to ‘sell’ from ‘hold’ and cut the price target to 150p from 180p following the company’s full year results.

It said management’s cautious guidance for 2016-17 showed additional heavy investments are required in the UK. Despite the improved top-line momentum, the margin recovery will likely take time and last longer than the three years it took French peer Carrefour, SocGen said.

The French bank also highlighted growing concerns over the entry of Amazon into fresh online. “Tesco is the leading online UK player and is the most at risk.”

SocGen said it was more cautious on the medium-term UK margin recovery and pointed to a still stretched balance sheet.

“Assuming no dividend and capex of around £1.3bn (which means no expansion), we see the company reducing net debt by just £600-700m per annum over the coming three years.”

In addition, the bank said there was scope for a de-rating and recommended switching into buy-rated into Carrefour.

Speciality chemicals group Johnson Matthey got a boost on Thursday as Credit Suisse upgraded the stock to ‘outperform’ from ‘neutral’ and lifted the price target to 3,100p from 2,850p.

It said the market underestimates the strength of JMAT portfolios and undervalues the structural growth opportunity in automotive catalysis and battery materials.

In the same note, the bank added outperform-rated Umicore to its European Focus List and highlighted its preference for the Belgium-based company. It said Umicore has greater potential valuation upside, a better diversified portfolio and lower-risk growth options in battery materials.

Credit Suisse said JMAT has a leading position in catalysis but requires significant investment in battery materials to hedge the portfolio further.

CS noted JMAT has acquired a position in lithium ferrous phosphate cathodes and a power tools battery business, although it aims to pursue acquisitions into mainstream nickel manganese cobal technology.

“We believe Umicore has the more favourable market position in mainstream technology and has expertise in scaling NMC cathode material production. JMAT is a credible entrant, although we think it should move quickly to carve out a sustainable market share.”