Broker tips: Rightmove, Anglo American, AB Foods

Morgan Stanley cut its forecasts and price share targets by varying degrees for internet players Rightmove, Auto Trader and Zoopla, but saw a higher price for Just Eat.

UK internet stocks are still benefitting from structural growth, the bank said in a note to clients, also offering high margins and cash returns.

"Macroeconomic impacts frequently accelerate online transitions and our marketplaces still offer good value to their underlying industries with the take-rate of revenue at circa 6% for estate agents, 8% for used car dealers and 13% for takeaway restaurants," Morgan Stanley's analysts wrote.

They added that they we are "not calling the bottom" of this market.

"Uncertainty is high and if macro forecasts are worse than feared, stocks could derate further. In the 2008 downturn, US, UK and Australian internet stocks indiscriminantly fell below 10xEV/EBITDA."

For car reseller group Auto Trader there was a 2% cut to 2017 expected earnings and a trimming of the target price to 460p from 490p.

Auto Trader's 'overweight' rating was reiterated and it is the top pick for the subsector as the company's top line is well protected by subscription-based revenue, with the business offering room to cut costs and the shares supported by cash returns.

"Historically, a free cash flow (FCF) yield above 5% has been an attractive entry point for online classifieds and Auto Trader now trades on 5.5%," the analysts said.

Estate agency marketplace Rightmove's earnings were downgraded 8% and its price target cut to 4,200p from 4,500p, though peer Zoopla's earnings estimates for 2017 were lifted 3% but the PT trimmed to 300p from 310p.

Rightmove was still rated 'overweight' and Zoopla at 'equalweight'.

"Operationally, we see Zoopla as most at risk given its weaker competitive position," the analysts said.

For fast food specialist Just Eat, on which an 'underweight' rating was retained on structural concerns, there was no changes to forecasts but its PT was lifted to 375p from 360p.

Anglo American shares rose on Thursday as Canaccord Genuity raised its target price to 620p from 480p, citing lower debt and a weaker pound against the dollar.

However, Canaccord said it believes the stock is currently overvalued and reiterated a ‘sell’ rating.

“We like the extensive restructuring proposed by Anglo American (AAL) early this year. The core divisions are formed around solid assets, with good mine life duration and decent returns,” the broker said.

“We think that as AAL sells assets, simplifies its structure and decreases its breadth of commodity exposure, it could potentially raise its risk profile should sector dynamics shift unexpectedly.”

Anglo has targeted between $3bn to $4bn in asset sales in 2016, including Coal divestments as well as the $1.5bn sale of Niobium and Potash expected to close in H2 2016.

Canaccord added that while debt and maturities have been a focus in the past year, it believes Anglo will be able to meet its maturities through 2018 and still maintain $4bn of cash on the balance sheet.

“In contrast to being overly concerned about debt, we now consider debt paydown to be the biggest valuation driver into 2017, and view reaching net debt of $10bn or below in 2017 as significant valuation support.”

Associated British Food’s rating was raised to ‘add’ from ‘hold’ by Numis on Thursday after the company said the weaker pound had improved the outlook for the current financial year.

The owner of Primark said it no longer expected a decline in adjusted earnings per share for the full year as it was set to benefit from a “significantly” weaker pound after last week's Brexit vote.

The company said the foreign exchange rates would have both a positive and negative effect on profit. “There would be an adverse transactional effect on the profit margin on Primark's UK sales, currently half of its turnover, a favourable transactional effect on British Sugar's margins and a translation benefit on group profits earned outside the UK, which last year were some 50% of the total,” AB Foods said in a trading statement for the 40 weeks to 18 June.

Numis said while the upgraded outlook on full year EPS was a plus, Primark’s margins would come under pressure due to drop in the value of the pound. The broker cut its target price to 3016p from 3145p to reflect the impact on Primark.

“We had previously assumed a 30 basis points (bps) year-on-year earnings before interest and tax margin decline for Primark next full year from existing transactional foreign exchange negatives and now assume an extra 150 bps impact so the margin is 10.0% versus an estimated 11.8% this full year,” Numis said.

“We also assume a modest like-for-like negative for sales this full year for Primark to allow for the adverse March and April weather effect publicised by H&M etc (ABF's first half was for the 24 weeks to 27/2/16 with the like-for-like off by sub 1% in the first half).”

Numis said its profit-before-tax expectations for 2016 to 2018 have changed from a previous £1.09bn, £1.20bn and £1.31bn, respectively, to £1.12bn, 1.20bn and £1.29bn.

Revenue estimates before were for £12.97bn, £13.65bn and £14.34bn for the same period. Numis now expects revenue of £13.12bn for 2016, £14.31bn for 2017 and £15.02bn for 2018.