Broker tips: Retail stocks, Tullow Oil, Glencore

RBC Capital Markets downgraded Marks & Spencer to ‘outperform’ from ‘top pick’ and Associated British Foods to ‘underperform’ from ‘sector perform’ but lifted Dixons Carphone to ‘top pick’ from outperform, as it took a look at the general retail sector.

As far as Dixons is concerned, the Canadian bank said it expects further market share gains, positive news flow on its higher-rated Connected World Services business and a potential property restructuring programme.

In addition, it pointed to further margin progression and a stronger TV upgrade cycle in 2016.

“As the only large-scale electricals and mobile retailer in the UK and Northern Europe, we believe Dixons Carphone's growth prospects are strong.

“With a favourable technology cycle and the growing demand for connected devices, Dixons Carphone is able to offer an unrivalled offering to its customers.”

RBC sees upside to management's target of £80m of synergies as Dixons Carphone benefits from an integrated mobile retail offering and consolidates its cost base.

In the longer term, it sees significant earnings potential from Connected World Services as Dixons Carphone leverages its unique expertise in the mobile and connectivity space to offer services to third parties.

The bank remains positive on Marks & Spencer shares but said it was mindful of soft clothing like-for-like sales and subdued international demand in the near term.

It said M&S' online execution has been stronger this year and strong buying gains should extend into next year, while the company’s food offer should continue to outperform.

In addition, the valuation is undemanding, with strong cash generation providing scope for multi-year cash returns, RBC said.

The bank cut Marks & Spencer’s target price to 600p from 700p and kept Dixons Carphone’s at 550p.

RBC took an axe to Associated British Foods, cutting its rating and slashing its target price to 3,000 from 3,700p on concerns about Primark.

It said the valuation is relatively full given a lack of earnings per share momentum and as it expects Primark's LFL growth to remain moderate.

“ABF has a strong management team but it faces cost and currency headwinds and we think Primark's longer term profit pool may be constrained by a lack of online exposure.”

RBC Capital Markets has upgraded Tullow Oil from ‘sector perform’ to ‘outperform', but has cut its target price from 400p to 260p due to low oil prices.

In a note sent on Monday, it said despite oil prices dropping to new lows, the company can push on.

“In H1/16 we expect Tullow to extend its asset-backed debt facilities, and this should enable investors to refocus on the potential of those assets.”

It said while three months is a long-term outlook in the current oil market, Tullow’s $3.7bn Reserve Based Lend is underpinned by its probable and proven reserves.

It was also positive about the company’s outlook.

“At 156p, a Brent oil price of ~$37/bbl and an EV/boe $5/boe 2P+2C, the risks are, we believe, to the upside.

“Looking ahead, we think $60/bbl oil could be a key resistance point for a recovering oil price.”

Glencore will be able to deliver on the promises made during its latest Investors´ Day, analysts at Citi believed, with possible asset sales holding the greatest potential to move markets.

The commodities trader said all of the measures announced then were steps in the right direction.

Those steps included: 1. an increase in the size of its capital preservation programme (from $10.2bn to $13.1bn); 2. reduced end-2016 target for debt (from the low 20´s to between $18-19bn); 3. strong 2016 marketing EBIT guidance; 4. sequentially lower unit cost guidance for 2016.

One of the other main targets unveiled was a targeted reduction of $1bn in the company´s working capital.

"While investors are awaiting another streaming deal (indicated by end-2015) and asset divestments, we remain confident in Glencore´s ability to achieve the remaining measures during 2016," analysts Heath R.Jansen and Jatinder Goel said in a research report sent to clients.

The broker maintained its 'buy' recommendation and 160p target on the stock.