Broker tips: Centrica, Purplebricks, Anglo American

Goldman Sachs downgraded Centrica shares to ‘neutral’ from ‘buy’ on Friday, cutting the price target to 132p from 158p following the company’s "weak" full-year results a day earlier.

It noted that since being added to the buy list in September 2018, the shares are down 17% versus the FTSE World Europe down 4%.

"Whilst Centrica announced increased cost-cutting efforts and stepped up non-core disposals, we see its FY results as a negative," said GS. "Centrica highlighted that 2019 adjusted operating cash flow (AOCF) is to be impacted by the UK default tariff cap, continued lower E&P and nuclear volumes, and cash tax phasing.

"Furthermore, Centrica stated around £100m of the £350m reduction in AOCF is also expected to impact 2019 adjusted earnings."

Goldman said that adjusting its numbers following the full-year release, it cuts its earnings per share estimates 13% on average over FY 2019-FY2021 and the FY 2020 dividend by 17% to reflect AOCF on its estimates being below Centrica’s threshold of £2.1-£2.3bn into FY 2020.

"In our view, FY 2019 is a trough year for the company, and we see EPS recovering from this level, but based on the near-term headwinds and potential risk to the dividend we downgrade."

JPMorgan Cazenove slashed its price target on overweight-rated Purplebricks to 188p from 400p on Friday following the company’s "disappointing" update a day earlier.

The company said on Thursday that it expected revenue for the current financial year to come in between £130m and £140m under IFRS 15, down from previous guidance of between £165m and £175m under IAS 18.

It also announced the departure of UK chief executive Lee Wainwright "for personal reasons" and the departure of US boss Eric Eckardt.

JPM said weakness was driven in particular by the international operations of the US and Australia.

"Key questions remain about: 1) the announced departures of key management figures (UK CEO, Lee Wainwright, and US CEO, Eric Eckardt) and 2) the level of opportunity going into the US (much weaker than expected US sales at this early stage are clearly worrying).

"With all that in mind (and materially reduced longer-term estimates given a weak outlook), we reassess the investment case."

Despite the "clearly disappointing" news flow, it said it still sees potential upside in the longer term and that the shares are now too cheap.

JPM said Thursday’s closing price doesn’t even reflect the UK value - on conservative numbers - and includes nil valuation for the international assets.

Analysts at JPMorgan Cazenove also upped their target price on multinational mining outfit Anglo American on Friday as it highlighted the group's ability to deliver a stellar combination of capital returns and growth.

Anglo American reported a 4% rise in full-year underlying EBITDA to $9.2bn driven by strong prices on Thursday, particularly in platinum group metals, thermal and metallurgical coal and nickel, as well as thanks to productivity improvements and cost control.

However, the company took a $600m hit from the suspension of operations at its giant Minas Rio iron ore mine in Brazil as upgrades were carried out.

With upgrades to Anglo's operational capacity in mind, JPMorgan said the firm's higher capex guidance since December had led it to reduce its spot 2019/20 free cash flow yield estimates from around 13-15% to 7%-9% at prevailing commodity prices.

In return, Anglo management forecasts 20-25% copper equivalent production growth by 2023 and a $3-4bn increase to its EBITDA by 2022 from productivity initiatives and new projects.

JPMorgan did note that Anglo's free cash flow was now the weakest of its peers but highlighted that it was also the highest growth, which the broker believes undervalues the group as a result.

In addition to upping its target price on Anglo American to 2,290p from its previous level of 2,270p, JP Morgan also reiterated its 'overweight' rating on the miner's shares while singling it out as its 'top pick' among UK Diversifieds.

"AAL is our top pick of the UK Diversifieds. We consider its multiples cheap (~4.0x 2019/20E EV/EBITDA, 9x PER, 9%/7% FCF yield mark to market) and not reflective of a company entering a peer-leading growth phase."