Broker tips: Tesco, Acacia Mining

Following Tesco agreeing to pay a £129m fine over its accounting scandal, HSBC has reiterated its ‘buy’ rating and 260p target price.

The bank believes that while the supermarket’s recovery continues it is still a long-term winner as the fine to be paid to the Serious Fraud Office will bring the accounting controversy to a close and that it also remains positive about its proposed merger with Booker.

Tesco reached a deferred prosecution agreement with SFO after a two-year investigation and the penalty should draw a line under the scandal, HSBC said.

In addition to the £129m fine to the SFO, Tesco will pay about £85m compensation to certain shareholders, incurring a £235m exceptional charge on its 2017 balance sheet.

It will not pay a penalty to the Financial Conduct Authority, but has agreed to find market abuse relating to a trading statement on 29 August 2014.

HSBC is also positive about its proposed £3.7bn takeover over of food wholesaler Booker, despite Schroders, the supermarket’s third-biggest shareholder, and Artisan Partners, who together hold a 9% stake in Tesco, voicing their concerns about the deal to the Financial Times.

The bank said that the takeover could “see significant synergies unlocked, see Tesco’s underutilised asset base better used and would create a platform well placed to benefit from industry changes.

Tesco remains an “attractive recovery story based on scale advantages, volume growth and margin recovery” to HSBC, and it expects its full-year results to be positive.

Long term, a return to a circa 4% margin in the UK is “logical” given underlying industry economics and Tesco should be able to earn a premium on the industry average.

A 4% margin is well ahead of the 1.7% delivered last year and if it achieves this, Tesco will “become a highly cash-generative market leader and should be able to eliminate any lingering balance sheet concerns”.

Acacia Mining

JP Morgan Cazenove cut its stance on Acacia Mining to 'neutral' from 'overweight' and chopped the target price to 500p from 610p, saying the Tanzanian concentrate ban highlights near-term headwinds to the re-rating thesis.

Early in March, Tanzania banned exports of gold/copper concentrate, a move that hit shares in Acacia, which generated around 30% of its revenues last year from the concentrate.

Although JPM acknowledged that Acacia remains one of the cheapest UK gold exposures, with near-term earnings multiples trading at more than a 50% discount to peers, it said the recent concentrate export ban highlights the risk of being exposed to a single jurisdiction.

As such, the bank reckons there are headwinds to the positive re-rating thesis until the market can re-gain comfort with Tanzanian risk and/or ACA can geographically diversify.

JPM noted that discussions continue with authorities to seek a resolution to the ban.

"At this stage, we make no changes to our base case forecasts although flag that under a scenario where the ban is immediately overturned the financial impact would be minimal, although a 'bear case' scenario could reduce pro-forma 2017/18 production around 35%/54% and around 35%+ to consensus EBITDA."

Within the UK gold sector, JPM retained a preference for Randgold Resources, which it rates at 'overweight'.

Its least preferred is Polymetal, however, which it downgraded to 'underweight' from 'neutral'.

JMP, which lifted the price target on the stock to 980p from 680p, said the shares have outperformed the Philadelphia Gold Index by more than 30% since June 2015 as Rouble-denominated gold prices rose more than 50% over the period.

"However, we now view Polymetal’s 9x EV/EBITDA as expensive and inadequately discounting the impact of Rouble strengthening and the risk of improving Russian economic conditions."