Broker tips: Ascential, miners, Vectura Group, construction firms, HSBC, Weir Group

Berenberg initiated coverage of B2B media company Ascential at 'buy' with a 400p price target.

The bank said it likes Ascential’s willingness to reshuffle its portfolio to continually maximise organic growth.

Berenberg pointed out that as of this year, the group is disposing of a third of its brands while integrating two high-growth acquisitions: MediaLink and One Click Retail (OCR).

This, coupled with a natural growth opportunity in the US and Asia-Pacific, where Ascential is currently underpenetrated versus peers, should help to drive a double-digit earnings per share compound annual growth rate over the next three years, it said.

"With one third of the company’s brands held for sale we believe that, upon their disposal, both growth and margins will improve. These disposals, coupled with a rapidly de-levering balance sheet, could give Ascential circa £200m of M&A firepower in the coming years."

Berenberg noted the company is holding the Heritage Brands as an ‘asset for sale’ on its balance sheet for £72m. On last year’s EBITDA, this would imply an EBITDA multiple of 6.2x.

"This is materially beneath what peers trade on, i.e. circa 11x EBITDA. Our cash flow estimates do not include the proceeds of these disposals but if we did, this could add around 10% upside to our base case price target."

Miners

Goldman Sachs adjusted its ratings on metals and mining stocks on Tuesday as it adopted a tactically bearish stance.

The bank downgraded BHP Billiton and Antofagasta to 'sell' from 'neutral' and cut their price targets to 1,100p from 1,400p and 650p from 800p, respectively.

Its downgrade of BHP reflects a bearish view on iron ore, which is around 41% of the company’s FY18 earnings before interest, taxes, depreciation and amortisation.

"This should see BHP’s earnings profile/free cash flow generation impacted and drive consensus downgrades in our view. In addition, it pointed to FCF generation from the oil business, noting that while its commodities team remains positive on the oil price, BHP’s oil business is barely generating FCF."

As far as Antofagasta is concerned, it said the 'sell' case is predicated on near-term downside risk to copper prices.

GS's economists reckon China is looking to tighten its monetary policy, which should have an impact on commodity demand. Also, with Escondida back online, the Grasberg issue being resolved and the reflation trade coming increasingly in question, the copper price rally could unwind, it added.

It downgraded Anglo American to 'neutral' from 'buy' and slashed the price target to 1,100p from 1,500p. GS said its upgrade in November was based on the belief that higher commodity prices, particularly iron ore and coal, would see significant FCF generation, which would lower net debt and result in a transference of value from debt to equity holders.

"This thesis held until mid-March, when the rebar price in China came under pressure, having a knock-on effect on the iron ore price (both are down c.25% from their highs).

"With the commodity price outlook increasingly bearish, we believe that Anglo’s shares are likely to remain under pressure over the near term."

Finally, Goldman removed Vedanta Resources from its Conviction List and cut the price target to 950p from 1,450p, but kept the stock at 'buy'.

The bank said that over the past two months, the stock has underperformed, paring all of its gains as sentiment towards mining has turned negative, with the market focusing more on Chinese tightening, which has seen rebar prices in China fall, with a knock-on effect on zing.

Vectura Group

Analysts at RBC downgraded Vectura Group to ‘underperform’ from ‘sector perform’ and cut its price target to 133p from 190p, as it remains cautious about the pharmaceutical’s success with its asthma drug, Advair.

The broker said that although upcoming events could push its target price to 150p - with sentiment potentially to 180p - its is cautious on success for Vectura and thinks that consensus forecast expectations have already priced in much of the upside.

Since the company’s merger with Skye, “Vectura has enhanced its capabilities as a development partner to peers but it has also provided the financial muscle to progress its own expansion as a specialist commercial player in the respiratory field”.

With this strategy still in its formative years, RBC sees investment in capabilities, commercialisation and research and development remaining high and likely to consume much of the free cash. It forecasts the business to generate from its key pipeline assets.

From the 10 May roll out of generic Advair (VR315) in the US, the broker expects it to add between £30-£50m per year in revenue for Vectura with a 50% chance of success. But when RBC modelled the outcome of this event, it found it difficult due to the multiple potential outcomes and lack of visibility on key data points.

Vectura is targeting three to five new generic deals and said theses deals “should each be additive to the investment case”.

The risks to the investment remains on potential delays or failure to the US roll-out of generic Advair from the price of competitor products and the number of other competitor launches.

Vectura could be the first to launch the drug after rival Mylan suffered a setback when it recently received a complete response letter from the US Food & Drug Administration for its generic version of GlaxoSmithKline's Advair Diskus, but believes that a “delay is more likely” from Vectura.

Construction firms

Taking a look at the UK construction services sector, JP Morgan Cazenove upgraded Carillon to 'overweight' and said Kier Group remained its top pick for quality.

The investment bank said it remained on the sidelines for sector-mates Balfour Beatty and Interserve, which both were kept on 'neutral' ratings, though Interserve's lowly 5.3 p/e ratio valuation is quite attractive for investors with a higher tolerance to risk. It was given a target price of 260p.

Compared to construction companies, their services providers have seen relatively modest margin pressure in recent years, with Cazenove calculating gross margins have fallen by 300-400 basis points.

Infrastructure construction has also been experiencing a short-term lull in activity, which analysts attributed to political uncertainty and upheaval delaying contract awards in both the UK and US.

"Against this backdrop, we tend to prefer services-orientated business, and also prefer lower value regional construction work to infrastructure in the short term."

Carillon was upgraded from its previous 'neutral' rating due to "several areas" of upside versus the bear case, particularly a forecast of gradual deleveraging.

"We are also not convinced that Carillion over-earns vs peers, or that any valuation adjustment should be made for reverse factoring."

Kier remained analysts' "pick for quality" in the sector due to an appreciation of the movement towards services, and highways in particular.

In addition, the current share price is calculated to imply around a 9% free cash flow yield on the core Construction & Services business.

Kier's target price was set at 1,639p, with Carillion's at 292p, lifted from 231p.

For Balfour, while a nod was given to management strategy that is expected to be successful "to an extent", analysts believed the current share price reflects the execution risk and margin pressure faced.

HSBC

Analysts at Deutsche Bank revised their target price for shares of HSBC modestly higher ahead the lender's first quarter figures, due out on 4 May.

The broker forecast that HSBC's underlying revenues grew by between 12% and 13% during the first quarter of 2017 to reach $12.4bn, referencing seasonality in its Global Banking and Markets unit and positive results out from its US peers.

Worth noting, the analysts highlighted that revenue growth was key to an improvement in HSBC's return on equity.

Deutsche estimated top line growth at GBM up by between 11% to 12% on a like-for-like basis, excluding FX moves and the impact from exceptionals and disposals.

Nonetheless, it might be too soon to expect to see the full benefits from rising rates coming through in the retail and commercial banking businesses, the analysts said.

Revenues at HSBC's US Retail Banking and Wealth Management franchise were seen up 6% year-on-year at $4.7bn.

Profits before tax in the quarter were pegged at $5.3bn for reported earnings per share of 12.5 cents.

The target price on HSBC was revised from 616p to 635p, with Deutsche sticking to a 'Hold' recommendation.

Weir Group

JP Morgan revised its target price on shares of oil equipment manufacturer Weir Group, judging that it had been too cautious regarding the firm's near-term pricing power.

The analysts said the improvement over recent months in the equipment manufacturer's two main end markets, Oil&Gas and Mining equipment, had been more dynamic than it expected.

Furthermore, its peers who had already reported their first quarter figures had surprised to the upside.

Given the 10% upside potential to the broker's target and risk of positive surprises should the pricing climate improve, JP Morgan decided to upgrade its recommendation from 'neutral' to 'overweight'.

Its target price was also revised higher from 1,800p to 2,175p.

The investment bank lifted its estimate for operating profits at Weir's Oil&Gas arm by 49% for 2017 and by 26% for 2018, on the back of the company's "aggressive" cost-cutting and expectations for higher top line growth.

A bigger than expected increase in the US rig count and stronger capex spend by US-based exploration and production firms meant sales at Weir were now seen growing 14% more than before in 2017 and 17% more in 2018.

Weir's Minerals unit was also expected to see better sales growth, with JP Morgan raising its estimate for sales by 5% thanks to high aftermarket growth and a "modest" improvement in capex related demand linked to brownfield developments.

The company's price-to earnings and EV/EBITDA multiples left its shares trading at "a modest premium to our industrial universe, despite the prospect of earnings rising around 4x faster than for the sector overall between ‘16 and ‘18E."