Broker tips: Rentokil Initial, Glencore, UK real estate stocks

HSBC raised its rating on Rentokil Initial to ‘hold’ from ‘reduce’ and lifted its target price to 190p from 145p on Monday.

The bank said the pest control company’s international businesses are likely to benefit from a weaker pound.

“Our target price implies 7% downside from the current price; we upgrade the stock to Hold from Reduce, because in an uncertain world, an overseas currency earner with potential to transform has some attraction.”

HSBC said currency moves are likely to make the sterling level of pre-tax profit growth expected materially easier to achieve.

The systems at Rentokil have improved, and discounting is better controlled than in the past, the bank added.

However, HSBC said its core concern about Rentokil continues to be the remuneration of staff which could lead to “bids won on cost assumptions that could not be met and could result in contracts either lost or with margin problems and pricing pressure in re-negotiations”.

“On top of this was a habit of remunerating senior staff, on performance excluding restructuring, coincided with 48 consecutive quarters of restructuring and ‘one off’ charges.

“In short, selling a turnaround to the market seemed to take precedence over the rather duller, more laborious, task of fixing the business.”

Credit Suisse downgraded Glencore to ‘neutral’ from ‘outperform’ and lifted the price target to 200p from 160p.

The price target lift reflects a 10% reduction in the bank’s GBP/USD assumption and a 4% increase to 2017 earnings before interest, tax, depreciation and amortisation largely on higher coal price realisation.

CS noted Glencore has rallied strongly year-to-date and while “it isn’t quite mission accomplished on deleveraging, credit concerns have reduced materially and an ongoing commitment from the company to reduce net debt to around $15bn should secure the group's investment grade credit rating".

However, the bank said it was still negative on copper, which is Glencore’s largest exposure at around 40% of industrial EBITDA.

CS said the stock’s valuation has now re-rated back to its target multiples and is more aligned with peers.

It argued that successful delivery of the company's main earnings and debt reduction targets together with latent capacity growth in copper and zinc still provides upside potential on a medium term view, but weak copper prices lead to a slower-than-planned return of copper volumes.

UK commercial real estate values were set to fall further, analysts at Citi said, but they believed the falls would only be a 'correction' - mostly cyclical in nature - and should be looked upon as a trading opportunity.

Nonetheless, they admitted the risk of a more severe property crisis existed.

"We are of the view that the UK and London will find a way to grow outside the EU and believe the current stock volatility is likely to continue providing investors with a trading opportunity," analyst Aaron Guy said in a research note sent to clients and dated 18 July.

In Guy's opinion, their was admittedly little "visibility" but so too many of the 'amplifiers' of the property crashes of the 1970s, early 1990s and 2007/2009, such as interest rates on the rise, high leverage and no immediate policy or liquidity tools were present this time around.

He also believed there was sufficient capital that held a positive view on the future of the UK to support a correction of between 15% to 20%, instead of a crisis.

"We currently estimate the risk of rescue rights issues and broader commercial real estate loan book distress to be low in what has been a risk off market."

Guy said Citi's view of a 15% to 20% correction was largely priced into stocks, so there was value in the broker's London-focused coverage, referencing as examples shares of Capital&Counties, Great Portland Estates, Derwent London, Land Securities and British Land - all of which he kept at 'buy' - albeit while at the same time lowering his target prices on many of them.

His target price on Capital&Counties was cut from 577p to 396p, that for Great Portland Estates from 1042p to 804p, for Derwent London from 4710p to 3257, on Land Securities from 1497p to 1268p and on British Land from 974p to 741p.

Intu on the other hand was downgraded to neutral and its target price slashed from 360p to 304p, alongside Segro, whose target went from 524p to 451p and Shaftesbury which had its target marked down from 1230p to 976p.