Broker tips: Diageo, Icap, ABF

The bank said the stock is currently trading at 19.5x its calendar 2016e EPS of 93.97p, in line with the peer group PE average, and it would wait for a more favourable entry point.

HSBC said that if Diageo wants to become greater than the sum of its parts, it will have to find a new winning formula or execute its current formula more vigorously.

“We think Diageo’s brands are and should be the envy of the beverage industry. But since management prepared the market for difficult times by removing sales guidance in November 2013, Diageo shares have been weak, down mid-teens (versus the market at 10%),” it said.

Shares in interdealer broker ICAP were under pressure on Friday after Barclays downgraded the stock to ‘equalweight’ from ‘overweight’ and cut the price target to 500p from 600p pointing to a lack of earnings momentum.

The bank noted that ICAP shares were a strong outperformer from January to May but have since come off and are now only up 1% year-to-date versus the FTSE All Share.

“Our analysis of ICAP’s electronic volumes shows weakening trends in recent months contributing to this. Volume comps get tougher from September 2015 onwards and the European investment banks are continuing to shrink their FICC divisions,” it said.

They added that earnings momentum has stalled and pointed out that ICAP has seen consensus downgrades since May with the 2016E EPS cut by 4% since that time.

Societe Generale downgraded Associated British Foods to ‘hold’ from ‘buy’ on valuation grounds as the stock has hit its 3,300p price target.

The bank said it continues to value ABF using a sum-of-the-parts with Primark valued at 20x estimated 2016 earnings before interest, taxes, depreciation and amortisation, which is now a meaningful premium to peers H&M and Inditex.

The bank said it was a little nervous about Primark’s US debut. Inevitably there will be lessons to learn as the Primark brand is not known in the US and it will take time to gain traction, it said.

“We continue to like the fundamental story but 33x price-to-earnings for 2017 EPS recovery and some risk in Primark US means that the risk-reward is more balanced from here.”