Broker tips: Rightmove, Kaz Minerals, Essentra, Smith & Nephew
Morgan Stanley has downgraded Rightmove to 'equalweight' from 'overweight' and kept the price target at 4,400p.
The bank said Rightmove has secular growth, high margins and an attractive capital allocation strategy, while structural drivers mean the company's revenue could still double from here.
It pointed out that Rightmove has a 70% share of time spent on classified sites, with 90% of agents on subscription and 34% more listings than Zoopla, so it benefits from a strong network effect.
However, weakness in the UK property market could continue to weigh on the shares, it said.
"We still view them as a solid hold for shareholders, but near term, we see more headwinds than catalysts; move to equalweight ."
MS noted the shares are within 10% of its target price and said uncertainty around Brexit is unlikely to trigger positive news flow around the property market. As a result, the shares could still de-rate from the current 23x2018e price-to-earnings.
The bank said a price-to-earnings close to 20x would be a better entry point.
In online classifieds, it highlighted a preference for overweight-rated Auto Trader, which is trading on 21x, with upside risk to forecasts.
Kaz Minerals
Shares in Kaz Minerals were under pressure on Monday as HSBC downgraded the copper miner to ‘reduce’ from ‘hold’ and cut its target price to 400p from 440p as it had been "too bullish" on Kaz’s production guidance for 2017.
HSBC downgraded Kaz Minerals discounting a copper price of about $3 per pound of copper and a strong set of results for 2016.
The bank said that it was “too optimistic” and has cut its production forecasts by 10% with even bigger changes for the by-products.
HSBC had assumed copper production at 276 kilotonnes for the 2017 financial year, but Kaz’s guidance was between 225-260 kilotonnes and so its updated forecast is at the top of this range at 254 kilotonnes.
“There is little change in gross unit cash costs but net unit costs are higher due to lower by-product credits. Furthermore, 2017 capital expenditure is about $200m higher due mainly to the under-expenditure in 2016.”
But HSBC said that the Kaz is still on track to produce about 300 kilotonnes per year of copper at $1 per pound in cash costs from 2018.
It expects 2018 will be KAZ's first full year at about 300 kilotonnes of copper and associated by-products at a time when the price of copper is set to rise and that the timing appears good and decent returns should be earned.
Capital expenditure is also higher for 2017, mainly due to a some $150m carry-over from 2016 and so, due to KAZ’s excessive leverage, HSBC said that the impact on the target price is material.
From the second half of 2018, net debt should decline at an annual rate of $500-600m per year, and so it will be sometime before the company will consider any dividend policy.
HSBC added that it does “not envisage that Kaz will be under any real financial pressure in the future, despite the fact that some of the debt ratio metrics appear challenging”.
Essentra
Packaging and filter products producer Essentra was on the front foot on Monday as Deutsche Bank bumped its rating up to 'buy' from 'hold' and hiked the price target to 600p from 425p.
Deutsche said it did not have enough conviction to turn positive on the stock after the profit warning in January, but chief executive Paul Forman has now spent more than 50 days in the role and his message remains that the issues are mainly self-inflicted and can be reversed.
DB noted the Porous disposal is said to be on track and so leverage is robust.
"Following the strong re-rating, better entry points might be possible but we believe Essentra offers a classic medium-term self-help story and upgrade to buy."
However, the bank cut its forecasts to reflect a more gradual recovery. It reduced its estimate for 2018 earnings before interest, tax and amortisation to £102m from £111m.
"We believe in a bounce-back at HPC packaging: first margins improving as double costing falls out (2018E-beyond); followed by revenue growth, which, in our view, can take longer (H2-18E, 2019E). Investors in the story should also keep in mind the trends in the other businesses comprising the Group, most of which also had a weak 2016, thus recovery should not be taken for granted."
Earlier this month, Essentra posted better-than-expected full-year earnings and maintained its dividend payout, but guided towards lower sales and profits in 2017.
Smith & Nephew
Goldman Sachs has downgraded Smith & Nephew to 'neutral' from 'buy' and cut the price target to 1,270p from 1,310p as it pointed to a less attractive growth outlook.
Back in March 2015, the bank upgraded the stock to 'buy', mostly on expectations that organic revenue growth across the businesses would accelerate to 5%+, driven by improving execution in wound in particular, as well as continued mid-to-high-teens growth in emerging markets and further shifts towards higher-growth end markets.
At the time, it argued that the acceleration in organic revenue growth and ongoing restructuring would result in improved operating leverage, and hence double-digit earnings growth, which would consequently warrant a re-rating to a Stryker-like multiple.
"However, this acceleration in growth has failed to materialise, as Smith & Nephew has struggled with execution in the advanced wound care business, growth in emerging markets has slowed, and the company has seen some competitive headwinds in the wound care devices and trauma markets, and structural growth headwinds in wound bioactives."
GS noted forecasts 4% average organic revenue growth for 2017-20, which drives a 6% operating income compound annual growth rate and an 8% earnings per share CAGR throughout the forecast period.
"In the context of this outlook, we find the current circa 16x price-to-earnings multiple (2018E) as appropriate, hence our neutral rating."