Broker tips: Anglo American, Rolls Royce, Reckitt Benckiser

On Tuesday, Anglo outlined its promised “radical” overhaul as it announced a pre-tax loss of $5.5bn after $3.8bn of write-down since the half year. The company said it planned to reduce the core portfolio to 16 diamond, platinum group metals and copper assets and announced further cost-cutting measures.

Deutsche Bank raised the price target to 465p from 300p, saying four main issues have now been addressed: commitment to a lower gearing level; an intention to sell some of the bigger, higher quality assets for value; presentation of free cash flow scenarios if spot prices worsen; and most importantly, a higher cost cutting target for 2016.

“We could not have asked for a bigger or more detailed plan – but now we move to timely execution,” it said, as it reiterated its ‘hold’ rating on the stock.

Meanwhile, Credit Suisse lifted its target price on Anglo to 470p from 320p, keeping it at ‘neutral’ as it raised its estimates for 2016 following the results.

“The company needed to act decisively and the cost cutting targets are materially better than we and the market expected, equating to more than a 10% year-on-year reduction in 2016 (excluding FX).”

“If the company delivers on its promises the re-rating could continue, however industry deflation signals ongoing price risks, leverage is high and asset sales carry obvious execution risks.”

Rolls Royce faces another challenging year in 2016, said Charles Stanley, although the broker kept its recommendation at ‘hold’ on Wednesday.

The company last week halved its final dividend to 7.1p per share as underlying full year profit before tax dropped 12% to £1.4bn. It marked the first dividend cut since 1992 and followed five profit warnings in the last two years. Annual group sales fell 1% to £13.4bn.

The marine division, exposed to falling oil prices, dragged on results. The civil aerospace unit was also under pressure as it tried to manage a transition from older, more profitable engines to new turbines.

Charles Stanley said the results were broadly in line with the lower end of City expectations.

“We anticipate another challenging year in 2016 with negative free cash flow stemming from lower profitability due to deterioration in the civil aftermarket (surplus spare parts), weak demand for corporate and business jet engines and continued pressure in offshore markets at Marine (oil price),” said analyst Tina Cook.

“The long-term value embedded in the civil aerospace business remains intact, but Rolls Royce will remain in a tough transition phase over the next few years.”

Investec upgraded Reckitt Benckiser to ‘hold’ from ‘sell’ and lifted the price target to 6,600p from 5,210p following the company’s full year results.

It said the 2015 numbers were comfortably ahead of both its forecasts and consensus expectations, led by another quarter of innovation-driven double-digit growth in Health, while mix, input cost tailwinds and strong cost control delivered better-than-expected margins in the second half.

The brokerage now forecasts organic sales growth of 5.1% in full year 2016, up from 4.2% previously and versus company guidance for between 4% and 5%.

It said Reckitt was one of the few companies in its coverage to be openly looking for acquisition opportunities, adding that this makes sense, given the company’s competitive advantage in consumer health.

“Reckitt also has a good track record in terms of bedding in acquisitions, extracting cost synergies and generating revenue synergies and step changing the innovation.”

However, it pointed out consolidation is an expensive business, noting Reckitt faces competitors with an equal appetite for these assets, which are in a similar position to generate synergies and are significantly bigger, “so any value destruction from bidding up has a relatively smaller dilutive impact”.

Investec highlighted the fact the Pfizer-Allergan deal is due to close in the second half of this year, noting the media speculation as to whether Pfizer’s consumer health business will come up for sale.

The brokerage reckons that in the event of a sale, Reckitt would be a likely bidder, but said that as things stand, any possible sale seems some way off with Pifzer indicating it will make a decision on this by end-2018.