Broker tips: Royal Mail, HSBC, Burberry

JPMorgan Cazenove downgraded Royal Mail to 'neutral' from 'overweight' due to the recent re-rating in the share price, the lack of positive catalysts ahead and a more operationally challenging period.

JPM, which upped its price target on the stock to 561p from 530p, said the revenue outlook for the company is broadly unchanged, with UKPIL revenue likely to remain around flat over time.

It expects a stronger parcels environment - possibly due to temporary Amazon trends - to broadly offset a weaker letters market. In addition, it argued that incremental parcel revenue growth has a higher variable cost component, such that its ability to fall-through to profitability is more limited.

As far as the cost outlook is concerned, JPM expects the rate of per-hour wage inflation at UKPIL to accelerate from 2.5% in FY18 to around 4.5% in the medium term. UKPIL cost inflation, meanwhile, is expected to accelerate by around 1% as a result of this, requiring approximately £70m of additional annual cost avoidance to hold profits flat over time.

"Combined with the revenue outlook...we believe this is likely to put downward pressure on profitability over the medium term," it said.

JPM said that on its forecasts, Royal Mail trades on a free cash flow yield of about 7%, which is a similar level to peers.

HSBC's "unique set-up" offers investors growth and yield, said Morgan Stanley on Tuesday as it upped its forecasts for the next couple of years and said "there is more to go" from the shares.

The investment bank predicts group net interest income will "ratchet higher", with forward-driven advantage across key currency blocks at $2.6bn to lift net interest income forecasts by additional 2%.

Analysts model a 9% three-year compound annual growth rate of net interest income from the group, 4% above consensus revenues in 2019/20, with additional USD-block upside.

"We like the bank's corporate and commercial business, particularly in Asia, as the NII upside in global transactional banking and fee upside in wholesale bank come through," was a second box-tick, with Asian financial integration and wealth growth/savings transformation "key" to this and market share gains already evident.

Finally, CET 1 capital is expected to build to 14.7% by 2020, giving an excess of around $12bn or 59 cents per share that would equate to a circa-5.1% yield in line with European banks.

"Uniquely, we also see growth," the analysts said, with new forecasts putting earnings 7% above the consensus, which is felt to be underestimating the positive NII impact as global rates go up and the capital options available.

The stock is rated a 'conviction overweight', with a 900p share price target.

While shareholders remain optimistic that new Burberry creative director Riccardo Tisci can return the label to its former glory, analysts at RBC Capital Markets see lower risk investments - and at similar valuations - elsewhere in the sector.

With retail like-for-like growth remaining below that of opex inflation, cost savings were protecting short-term profitability at Burberry's, the analysts said.

Investors might also be willing to let pass further pedestrian performance from the retailer as they wait for Tisci's first collection in February 2019, they mused.

Furthermore, RBC said returns on investment trends were still "encouraging".

Tisci, who put Givenchy back on the map in 2005, was seen as the key reason the market continued to view Burberry as a glass half full situation, but the analysts questioned whether that patience would hold out if the group continued to underperform throughout the first half of 2019.

However, RBC warned that Burberry needed to increase its fashion content to attract new young consumers but also needs to be mindful of the risk of losing core customers who currently buy its heritage offer.

It also saw "faster top/bottom-line growth with lower risks at similar valuations elsewhere in the sector."

Their assumptions for like-for-like growth in retail in 2019 and 2020 on the other hand were unchanged.

Together with improved wholesale guidance that led RBC to lift its target price on the shares from 1,600p to 1,750p, albeit while reiterating its 'underperform' recommendation on the fashion house's stock.