Broker tips: KAZ Minerals, RBS, Barclays, Lloyds, Glencore

KAZ Minerals was downgraded to 'neutral' by analysts at Credit Suisse on Friday, while UBS slashed its share price target.

In Credit Suisse's view, KAZ's appeal had been its low-cost operations that drove its strong free cash flow and its balance sheet, all of which have been "turned on its head" as a result of the FTSE 250 group's $900m acquisition of the Baimskaya copper mine from a group of investors including Chelsea FC owner Roman Abramovich.

The Swiss investment bank said that investing in Baimskaya will mean KAZ's capex will remain "very elevated" for the next eight years, meaning free cash flow would shift to negative over the period, driving net debt up every year.

"All this would be somewhat easier to grasp if we were confident on significant long-term value in the project but with it completely undeveloped, requiring lots of upfront capex and in a region that comes with higher ESG/political difficulties, this is not the case," said Credit Suisse.

Credit Suisse said that Baimskaya is projected to cost KAZ roughly $5.5bn in capex with production not due to begin in 2026 when it is expected to produce an average of 400,000 ounces of gold for the first ten years of its total 25-year lifespan.

In addition to the downgrade from 'outperform' to 'neutral', Credit Suisse also slashed its target price on KAZ Minerals from 1,050p to 630p.

The broker, which previously used net present value to drive its target price on KAZ, now thinks the method is "the wrong way to look at it".

"Given financial risk and poor earnings momentum in the coming years, we think the stock will trade at a big discount to this NPV until the market becomes a lot more comfortable with the new project," the analysts noted.

Similarly, UBS cut its price target to 660p from 940p as while KAZ has helped address some investor concerns about the project, analysts felt it is "unlikely to change the market's negative perception of the project".

Analysts at HSBC sounded a more positive note on RBS and Barclays on Friday, but not Lloyds, following the 15-20% decline in their share prices over the past three months, on the back of concerns around geopolitics (and Brexit).

Nevertheless, while valuations for the three lenders had improved, with all of them now looking simply 'oversold', their 'operating story' had not, they said.

They were particularly more upbeat on RBS, raising their target price on its stock from 280p to 290p, while upgrading their recommendation from 'hold' to 'buy'.

Barring a 'hard Brexit', or other significant 'macro issues', RBS should see "modest" revenue growth, HSBC said.

More importantly however, the shares had underperformed those of its peers as hedge funds looked to turn a quick profit from the government's sale on 5 June of a 7.7% stake in the lender.

With scant liquidity in the market, their price took a hit as the hedge funds sold, with institutional investors having remained on the sidelines during the placing for a "variety of reasons".

But another placing by the government was deemed unlikely in the near-term and RBS should be able to begin buying stock in early 2019, thus reducing the overhang in its shares, HSBC said.

For Lloyd's on the other hand, HSBC trimmed its target price from 72p to 68p, arguing that the lender was 'overearning' - more so than other UK lenders even - due to its residual book of unrealised gains on Gilts and its legacy mortgage book.

As well, with a 21% share of the mortgage market and a quarter of that for credit cards, it was in a weak position within an increasingly fragmented market place, the analysts said.

Lastly, HSBC kept its 'buy' on Barclays, lifting its target price from 260p to 270p and selecting it as its preferred UK bank name, explaining that they wree increasingly confident that it would earn close to a cost-of-equity ROTE in 2019, with room for upside.

Nonetheless, for all three lenders HSBC said: "Overall then we don’t see a particularly propitious market backdrop for the UK domestic banks.

"We're expecting subdued volumes and a margin outlook with risks to the downside. And while there might be meaningful longer term benefits to come from digitisation or even Open Banking, for the foreseeable future this is likely to be offset by the massive investment cost required to both deliver that digitisation and update core banking systems."

"Last bear in town" Liberum upped its stance on Glencore to 'hold' from 'sell' on Friday, meaning there are no more 'sell' ratings around on the miner.

The brokerage pointed to a 24% drop in the share price in the last couple of months as the market repriced the stock's risk.

"Whilst sentiment could deteriorate further on trade war escalation and investigation developments, it is divorced from the reality of strong commodity fundamentals in China. We do expect demand to eventually roll over, but this is highly unlikely in the short term with the recent upswing in Chinese real estate.

"There are lack of near-term catalysts for us to be buyers, but if copper prices to move below $2.50/lb, chance of supply side response increases and would present a buying opportunity."

Liberum pointed out that following its upgrade of Glencore, there are no more 'sell' ratings on the street, which would normally lead to sharp price falls.

"However, even with our bottom of consensus forecasts of $2.50/lb copper and $75/t thermal coal in 2019, Glencore still yields an attractive free cash flow yield of 11% and this feels like a fair time to upgrade despite the ongoing equity and market risks."

Liberum has a 300p price target on Glencore.