Broker tips: Rio Tinto, BHP, Quiz, Ultra Electronics, Just Eat

Rio Tinto and BHP were knocked lower on Thursday as Societe Generale downgraded its recommendation on both stocks as it moved to a more cautious stance on most of the metals and mining stocks it covers following year-to-date gains.

SocGen noted that the Stoxx 600 basic resources index is up 16.5% year-to-date in USD terms, following a correction in the second half of last year. As of now, the index has recouped about half of the ground lost since the 2018 peak, leaving room for another leg up if macro conditions stay supportive, it said.

On the other hand, however, equities have outperformed base metals, which is a cautionary sign judging by historical precedents, just as bulk commodities seem to be peaking again.

"While sentiment towards the sector remains positive, it is uncertain how long this will last given mixed macroeconomic data and relatively subdued commodity price momentum," it said.

SocGen downgraded BHP to 'hold' from 'buy', taking the price target down to 1,680p from 1,780p. It noted that the shares have risen around 17% since its last update, mainly due to the distribution of proceeds from the disposal of onshore oil assets completed in December.

"We like BHP’s positioning in the commodity space and high degree of diversification, as well as the long-term growth optionality. That said, its free cash flow yield ranging 6-7% in 2019-21e does not look sufficient to have a more bullish stance at this juncture."

It cut Rio Tinto to 'hold' from 'sell' and reduced the price target to 3,830p from 3,880p. The bank said the downgrade reflects recent price gains on the back of the rebound in iron ore markets, which it reckons might be short-lived.

Peel Hunt downgraded its stance on fashion brand Quiz to 'sell' from 'hold' on Thursday after it issued its second profit warning this year, cutting the price target to 12p from 25p.

Quiz said earlier that group EBITDA for 2019 is now expected to come in at £4.5m versus a previous forecast of £8.2m, while revenue will be £129m, down from its £133m estimate in January and 2018's £116.4m, following a disappointing start to the year.

The broker noted that while online sales have held up, in-store sales have been "beyond poor". Quiz said revenue in the period from 1 January 2019 to 28 February fell 1.7%, with a 16.2% jump in online revenue offset by an 11.1% drop in revenue from the group's UK standalone stores and concessions.

Peel said the travails at Debenhams and House of Fraser won’t have helped, but there is a fundamental problem here that the ranges are just not resonating with customers.

It said Quiz has always been close to its customers and engagement on social media is high but the latest ranges have not drawn people into the stores.

"That online sales are robust (although growing much slower than they were) is at least some solace but at a time when we think the general UK consumer is on a more even keel than it was before Christmas, this without doubt is a Quiz-specific problem."

"EBITDA may be positive next year but pre-tax losses are assured, and there seems very little reason to hold the shares, even at the lowly levels they will plumb today."

Ultra Electronics results this week and management's confidence "draw a line under a challenging two years" and led JPMorgan Cazenove to take a positive view of the defence contractor's shares.

Following two years of earnings per share cuts, contract problems, a change of chief executive and a terminated acquisition attempt, Cazenove said Ultra "should now benefit from an improving US defence market, EBITA margins stabilising in the mid-teens, a return to more normalised cash conversion (from 2020), and improved management".

Results for last year, released on Wednesday, showed 2.2% organic growth and a 5.2% organic increase in the backlog.

While the analysts believe Ultra can achieve circa 4% per-year organic growth from 2019-21, they tweaked down their 2019-21 forecasts for EPS by 3% per year, mostly because the company will now take its pension finance charge above the line.

However, as a result of the reduced risk profile of the group, the analysts applied slightly higher target multiples, leading to a December 2019 price target increasing 4% to 1,820p, for 26% potential upside and resulted in an upgrade to 'overweight' from 'neutral'.

Analysts at Barclays downgraded online food ordering and delivery service Just Eat to 'equal weight' on Thursday, citing limited upside to their 785p target price on the back of slower growth and heightened competition.

Barclays said it was "slightly concerned" by Just Eat's weak fourth-quarter order growth in the UK, which the bank seems to think suggests just 6-7% organic growth with the marketplace grinding to a halt.

Furthermore, weather only had a limited impact on Just Eat's performance, they said, explaining that competition also appeared to have "stepped up".

"In Feb, Uber Eats cut its fees for merchants and it will sponsor Love Island. These events have happened after the FY, but we believe are clear anecdotal evidence that Uber is becoming more aggressive in '19 in the UK, which remains ~90% of group EBITDA," Barclays pointed out.

On a cheerier note, upside risks were present in the form of a break-up, as suggested by activist shareholder Cat Rock, and they saw potential merit in such a move.

"The industry has relatively quickly consolidated; we anticipate that this will continue and JE has assets which we believe could be non-core, which include LATAM and ANZ."

Barclays made only minor changes to its headline estimates but maintained its 785p target price.