Broker tips: Fresnillo, Mitie, Sky
Morgan Stanley upgraded its stance on silver miner Fresnillo to ‘equalweight’ from ‘underweight’ and lifted the price target to 1,620p from 1,520p, saying the risks are now more fairly priced.
The bank said the modest de-rating of the stock leaves the equity better priced to reflect continued risks to projects already in execution and potential for further deferral of additional growth.
MS added that Fresnillo's growth plans are ambitious, with 40% silver volume growth planned from 2016 to 2018. It said that while execution risk around this growth remains elevated, it is now more fairly reflected in the valuation.
“Fresnillo’s 2017 spot EV/EBITDA multiple has dropped from 20x at the end of July to 14.7x now. It remains fully valued versus the rest of sector with only Randgold coming close at 13.6x, but the multiple reflects the potentially superior growth profile and cost position versus peers.”
Morgan Stanley said current spot prices are likely to be sufficient to justify further project approvals, meaning the likelihood of further delays to growth plans has subsided.
MS said its commodities team has lifted silver price forecasts by 7%, 13% and 8% for 2016-2018. This drives an earnings per share increase of 12.5% on average for the next three years at Fresnillo and is the key reason for the bank’s price target increase.
Investec downgraded Mitie to ‘hold’ from ‘buy’ and slashed the price target to 188p from 360p as it pointed to the outsourcer’s uncertain outlook.
In the company’s trading update on 19 September, it significantly downgraded its interim and full-year outlook, without giving quantitative guidance, citing a number of headwinds.
In addition, restructuring costs of £10m are also expected to impact full-year profit, with a £15m benefit expected in the second half of next year, the brokerage said.
Mitie warned earlier this month that full-year profits would be material lower than expected due to a drop-off in higher margin contracts in the first-half and the cost of new efficiency programmes.
It said that revenue and profit in the property management segment had been significantly hit by local authority budget pressures and particularly by the statutory social housing rent reductions that came into effect in April, which reduced the funding available to local authorities and housing associations for repairs, maintenance and project works.
Investec said: “Compared to its two most closely aligned peers, this is still a premium to the recently issue-beset Interserve due to higher estimated operating margins, but a discount toMears given significant further downside risks.”
Sky got a boost on Tuesday as Kepler Cheuvreux upgraded the stock to ‘buy’ from ‘hold’ saying its discounted cash flow-based fair value of 1,100p suggests nearly 30% upside from current levels, which is the highest in its large-cap media universe.
The bank noted the stock has dropped by 23% in absolute terms and 20% relative to the sector year-to-date, making it one of the most de-rated European media stocks in 2016, with only highly cyclical stocks such as ITV and Mediasetperforming worse.
Kepler said the shares have been hit by two main issues, the first of which is the ongoing perception that its addressable market is shrinking. The second is further runaway cost inflation generated by the Bundesliga rights tender.
“Sky is poised to continue generating broad-based revenue growth of 5-7% until the end of the decade, which is above its European Media peers (circa 3%), and we are at the onset of a potential two-year hiatus in major sports rights tender risks.
“Despite this, a sharp de-rating year-to-date…leaves the group at a 45% discount to its historical average, and 75-85% to pay-TV transaction ratios, such as the EV/subscribers ratio, which best captures the upside potential of low-margin Sky Europe.”
Kepler said innovation and technology are allowing Sky to continue to grow its revenue by above-average rates thanks to a broad-based combination of new subscribers, increased product take-up from the existing base, price increases, share gains in advertising and content sales.