Broker tips: Smiths Group, WH Smith, Burberry

Exane BNP Paribas downgraded Smiths Group to ‘underperform’ from ‘neutral’ and cut the price target to 830p from 1,000p.

The bank said new management inherits two legacy issues.

Firstly, it noted that organic sales growth has lagged the sector for years and said growth for both the medical and John Crane businesses will be tough.

Secondly, it said the situation regarding legacy liabilities has improved but these issues are not fully resolved. Exane said its analysis suggests the cash cost of a final solution may still be too high, limiting the options for a break-up scenario.

“Something has to give; we think the dividend will have to be cut. Under our dividend assumption, the shares actually yield less than the rest of the sector,” it said.

Peel Hunt upgraded WH Smith to ‘add’ from ‘hold’ and lifted the price target to 1,680p from 1,500p following the company’s full-year results.

“WH Smith is taking full advantage of positive macro trends in Travel, continuing to find cost savings on the high street but crucially is also developing its international arm profitably,” the broker said, adding that cash generation has remained strong.

The brokerage said the high street business continues to find cost savings and is highly cash generative, and it was possible to apply a fairly lowly multiple to the business and still come up with a sum-of-the-parts valuation nicely above the current share price.

Bank of America Merrill Lynch has downgraded Burberry to 'neutral' and cut its target price to 1,500p after the fashion group's first-half sales fell short of forecasts.

Burberry management have been quick to kickstart cost cutting to preserve profits but while full-year earnings before interest and tax of £445m was confirmed as still on target, in line with consensus, Merrill said the assumption of a return of mid-single digit was "too optimistic".

"While we do not question Burberry’s brand equity, strategy or execution," analysts concluded, "the trading environment is tough and only amplified by its geography mix."

The house view is that China risks remains skewed to the downside and the sector specialists continue to remain cautious on the luxury goods sector.