Broker tips: Renishaw, Randgold Resources, Easyjet

Renishaw was given a boost on Friday after Numis upgraded its rating on the engineering company to ‘buy’ from ‘add’ and raised the target price to 3,500p from 3,000p.

The FTSE 250 firm on Thursday reported revenue increased to £240m in the six months ended 31 December 2016 from £198m the same period a year ago, supported by underlying growth of 12% and a foreign exchange benefit of 9%. Pre-tax profit rose to £35.6m from £28.5m.

Underlying revenue growth was driven by the metrology business which saw revenue rise to £227.1m, compared with £184.9m the prior year.

“The very strong growth in metrology is a further proof of its strong structural positioning (geared into automation, speed and higher precision in manufacturing),” said Numis.

“We believe future prospects continue to look strong as this gets complemented by additive manufacturing, potential for a (slightly) stronger capex cycle at Apple (ahead of iPhone8) and (eventually) contribution from new Healthcare products.

“This should sustain high levels of revenue growth and also drive margin expansion, resulting in long term high teens earnings growth."

Canaccord Genuity on Friday downgraded Randgold Resources to ‘hold’ from ‘buy’ and cut the target price to 6,400p from 7,180p.

Ahead of Randgold’s fourth quarter and full year production results on 6 February, Canaccord cut its estimates for gold prices following a decline in November and December. The average price for 2016 was $1,248 per ounce.

The broker reduced its forecast for 2017 gold prices by 8% to $1,183 per ounce while the 2018 estimate was lowered by 7% to $1,206 per ounce with further declines of 4-6% per year expected from 2019 to 2022.

Canaccord noted Randgold’s announcement of improved recovery rates and throughput at the Kibali prospect in the Democratic Republic of Congo. However, the miner also warned that grades would remain a challenge until the underground mine is fully commission in late 2017.

“We are not changing our Kibali forecast of 593,000oz for 2016 (guidance 610,000oz), and slightly lower our 2017 estimate from 622,000oz to 611,000oz (2017 guidance c.625,000oz),” Canaccord said.

The broker expects full year 2016 gold production of 1.23m ounces, compared to Randgold’s guidance at the “lower end” of the 1.25m to 1.30m ounce level.

Given the slightly lower realised gold price, Canaccord lowered its earnings before interest, tax, depreciation and amortisation (EBITDA) forecast for 2016 from to $540m from $553m and its earnings per share estimate to 289 cents from 299 cents.

For 2017, the broker reduced its 2017 EBITDA estimate to $527m from $615m and EPS projection to 264 cents from 330 cents.

“With our lower gold price deck, our net present value forecast drops from 5319p to 4729p, and we lower our target price from 7180p to 6400p.

“Given that Randgold shares are currently trading at 6420p, we lower our recommendation from Buy to hold. At the current gold price, we estimate the fair value for Randgold (based on our 1.35x P/NAV multiple) is c.5970p, ie c.8% below the current share price.”

Shares in budget airline easyJet flew lower on Friday as Goldman Sachs and Davy downgraded their stances on the stock.

Goldman downgraded easyJet to ‘neutral’ from ‘buy’ and cut the price target to 970p from 1,160p, citing a deteriorating free cash flow outlook.

The bank said ongoing pricing pressure on intra-European routes, combined with FX headwinds, will put pressure on easyJet’s profitability. It expects an average 2017-19E earnings before interest and tax margin of 8.4% versus 12.5% for 2013-16E. As a result, it forecasts negative free cash flow and increasing leverage going forward, raising questions around the sustainability of dividends.

EasyJet was also hit by a downgrade to ‘neutral’ from ‘outperform’ by Davy, which said: “We think that easyJet now has big decisions to make – is it a dividend yield or growth stock?”

It added: “The dividend pay-out ratio of 50% of profit after tax results in a c.4% dividend yield. However, given the drop in returns and the significant capital expenditure programme and dividend requirement, it results in negative free cash flow for the next number of years.”

Davy cut its price target on EZJ to 850p from 1,100p.

Iberia and British Airways parent International Consolidated Airlines Group was faring a lot better, however, after GS upgraded it to ‘buy’ from ‘neutral’ and lifted the price target to 580p from 490p, citing an attractive valuation and strong free cash flow yield.

GS argued that IAG has the most attractive exposure to the North Atlantic among EU flag carriers. In addition, it highlighted the strongest free cash flow yield, forecast at 9% in 2018, and said this should give scope for cash distribution and deleveraging.

Davy reiterated its ‘outperform’ on IAG on Friday, bumping up the price target to 610p from 460p.

RBC Capital Markets also turned more positive on IAG, lifting it to ‘sector perform’ from ‘underperform’ and raising the price target to 450p from 375p.

“UK GDP is better than we expected since we set IAG forecasts and as outlook is more positive, our underperform rating has been wrong. We reflect this, and tighter 2017 Atlantic seat outlook, and move to sector perform.”