Broker tips: Imperial Tobacco, Ocado, Home Retail

“We now believe a takeover is more likely than we did before FT Alphaville reported on Nov 20 that ‘advisers to British American Tobacco’ have put together a group of banks ‘willing to support an offer’,” the bank said, adding that the new price target assumes a 33% chance of a bid.

Citi said that even without a bid, the underlying investment is decent, playing well to its strategists’ themes with a high and growing dividend and exposure to Europe, while the price-to-earnings ratio is much lower than other consumer staples.

In addition, it pointed to the company’s self-help initiatives, with cost savings from the US and from pricing power.

“We still believe that the most likely outcome is that BAT does not bid for Imperial in the next 12 months, essentially because we believe it doesn’t fit in with its strategy, and because it would be exceptionally hard to organise (for anti-trust reasons). However, there are some good arguments in favour of a bid.”

Ocado got a boost after UBS upgraded the stock to ‘buy’ from ‘neutral’ with an unchanged target price of 480p.

“Having looked in depth at most corners of the earth, we think Ocado is comfortably ahead of anybody else in making online grocery profitable and scalable,” the bank said.

It noted that Ocado was expecting to sign a new partner in 2015 but, with around 90% of the year complete, it hasn't happened yet.

“We think the unique business model is attractive but, in our view, some expectations in the market had become too optimistic (it was the reason we cut the shares from ‘buy’ to ‘neutral’ in July). With some of the heat coming out as the year has wound on, we see greater scope for surprise.”

RBC Capital Markets and Investec said fresh rumours of a £1bn takeover bid for Home Retail Group were credible but also highlighted that the shares are undervalued and could recover under current management.

Home Retail, the owner of the Argos and Homebase retail chains, is "being circled by potential buyers" after its recent profit warning, according to reports on Sunday.

The investment banks said such reports were not surprising given the recent weakness in the shares and valuation support that lies within the group, notably its net cash position of close to £200m and fully-funded net loan book that will top £600m by year end.

"Bid discussions tend to come and go, however we think the company's depressed valuation and potential for an alternative strategy means that the press reports cannot be dismissed out of hand," RBC said, which has a 150p price target and 'outperform' rating.

Investec said it continued to see Home Retail as a value play in its own right and has a 155p target price and 'buy'rating on the shares.

"Significant strides have been made to restructure Homebase and Argos’s business model is capable of delivering operational leverage through an efficient multi-channel model. However, market sentiment - and external interest - is likely to wait until proof of delivery through peak at Argos for confidence in its plans to build."