Broker tips: Thomas Cook, DFS, Glencore

The chance to regain lost demand for its Eastern Mediterranean and North African offerings makes package holiday provider Thomas Cook a "compelling recovery play", said Jefferies.

Jefferies analysts signalled that Thomas Cook's 10% increase to its airline capacity throughout the first quarter, helping it tap into ancillary sales and regain some of its lost customers in the Eastern Med market, should drive a step change in organic growth.

The broker believes that Thomas Cook's self-help programme is beginning to bear fruit, with the potential for job rationalization to come through recent innovative partnerships with the likes of Expedia.

Jefferies initiated coverage on Thomas Cook with a 'buy' rating and a price target of 180p on Monday, noting that capacity gaps left in the wake of Air Berlin and Monarch's recent collapses would introduce new angles for revenue improvement.

"We conclude that a consumer downturn is not necessarily a material risk to the package holiday and that Thomas Cook stands to benefit from the structural growth of an ageing population," the analysts wrote.

Elsewhere, analysts at Jefferies upgraded their rating of furniture retailer DFS from ‘hold’ to ‘buy’ on Monday, citing the company’s acquisition of Sofology and its "resilience" in the face of a challenging market.

The UK upholstery market is expected to decline by 2-3% over the next 12 months but Jefferies analysts noted that the first-half results for DFS showed that with "better visibility of market growth, flexibility in operating expenses and marketing cost deflation, it is able to limit operating deleverage.”

The retailer’s like-for-like sales fell 4.6% over the period but EBITDA margins fell by just 20 basis points and DFS also managed to expand its market share to over 30% through the acquisition of Sofology and eight Multi York stores.

The Sofology deal from August is viewed as particularly crucial by Jefferies, which expects it to result in the addition of 28% more stores, 25% more sales, 10% more EBITDA and 5% more EPS by the end of 2020.

Risks that the company may face in the near future include potential difficulties with the integration of Sofology, rising interest rates, IFC legislation changes and manufacturing issues.

However, as Jefferies analysts see further market deterioration as unlikely they have raised DFS’s target price to 255p from 210p.

"We like DFS's sofa market leadership and ability to flex its operating costs (more than 85% variable) to deliver growth in profits. Increased visibility over DFS's cash flows and limited downside risk to the market declining further leads us to increase our target multiple for DFS.”

Complications at mining giant Glencore continue to mount following the freezing of its assets in the Democratic Republic of the Congo as a result of a $3.0bn claim from an Israeli businessman, leading analysts at RBC Capital Markets to reassess their stance.

Late last week, the Swiss commodities group announced that Katanga Copper and Mutanda Mining, Glencore's Congolese majority-owned businesses, had been served freezing orders via a claim from tycoon Dan Gertler, the company's former partner in Congo, who said he had not received due royalties following his inclusion on the recent US sanctions lists.

Gertler's Ventora issued freezing orders against Katanga and Mutanda for roughly $2.28bn and $695m respectively, which it said would be the damages relating to future royalties due to it. Katanga disputes that Ventora has any claim against it. The contracts between Mutanda and Ventora are subject to English Law and arbitration in Hong Kong, while the agreement between Katanga and Ventora is subject the exclusive jurisdiction of the English courts, Glencore said.

Although the situation remains unclear and Glencore denies any breach of its agreements with Gertler, RBC still saw cause to downgrade its stance on the group from 'top pick' to 'outperform'.

"Assuming Glencore's DRC assets halt production, the impact on the copper market is likely to be large," the Monday note from RBC said.

"Our analysis suggests the lost 360kt of copper will shift the copper market into deficit for 2018," it added.

However, RBC still likes the look of Glencore, as its forecasts still managed to place the FTSE 100 group in line with its sector peers and even went as far to say that if the miners marketing business was capable of providing lower earnings volatility, a premium rating would be expected to be reissued in just a short time.

"Owing to the nature of the challenges facing Glencore's presence in the DRC, it will be nearly impossible to provide definitive forecasts for the DRC assets until further developments occur," RBC said.

"For now, we think it prudent to remove these operations from our forecasts and shift to a risked value for the assets," RBC's analysts added.

RBC also dropped Glencore's target price from 460p to 410p.