Broker tips: Rio Tinto, Volex

Analysts at Berenberg downgraded mining giant Rio Tinto from 'buy' to 'hold' on Thursday, stating steel demand headlines had tempered sentiment.

Berenberg said following the release of Rio Tinto's first-quarter results, it had chosen to downgrade the stock and reduce its price target to 6,500.0p, implying an 11% upside.

While the analysts said the mining sector and Rio had "performed well" since its upgrade in January, recent statements from the Chinese government about the curtailing of steel production, weak demand, ongoing lockdowns in key steel-making hubs such as Tangshan, and a volatile local property sector, had led them to believe that while the iron ore market was likely to remain "fairly tight", mainly on the supply side, further price gains also appeared to be "unlikely" at this point.

As such, with an R2 of 0.71 to the iron ore price since the beginning of 2019, the German bank thinks that dampening sentiment from a demand standpoint will temper further gains in Rio shares, despite softer operational first-quarters from Rio Tinto and Vale, which have kept prices steady for now.

"Yesterday's share price reduction of 4.8% is a reflection of more conservative sentiment on China (plus a weak Q1), exacerbated by soft PMI data which showed a deterioration month on month for March; until there is more constructive rhetoric from China from an economic stimulus standpoint (an H2 theme depending on how GDP growth plays out over the summer), we think Rio offers limited share price upside," said Berenberg.

Analysts at Canaccord Genuity lowered their target price on electronic connector manufacturer Volex from 510.0p to 440.0p on Thursday but said the firm appeared to be "well on track" to exceed its five-year plan.

Canaccord Genuity said Volex continues to see "robust demand" across all sectors, with full-year 2022 revenues projected to be at least 37% higher year-on-year at $605.0m and underlying operating profit projected to be no less than 28% higher at $55.0m.

The Canadian bank highlighted this as being "a good performance" within a "challenging" operating environment.

However, Canaccord opted to lower its target price to reflect a broad sector de-rating so far this year, stating that at its revised target price, Volex would trade on a 2022 price-to-earnings ratio of 22x and an enterprise value/underlying earnings ratio of 15x - which represents a roughly 10% premium to the blended sector average.

"With a five-year sales CAGR of 15.3% (CY18-23E) and EPS CAGR of 21.4%, we believe this reflects the sector leading growth on offer. We reiterate our 'buy' rating," said Canaccord.