Broker tips: Greene King, Morgan Advanced Materials, British Land, ASOS, Paddy Power

Shares in Greene King were sent lower on Tuesday as Berenberg reiterated its view that the pub company was an investment "value trap", with underlying trading remaining poor and profit "likely to go backwards again" in 2018.

Analysts at the German bank, repeating their 'sell' recommendation on the shares and 430p target price, said management’s debt refinancing "appears to be destroying shareholder value in order to flatter the P&L".

However, the analysts told clients they thought this is being "disingenuous with shareholders" as "in reality" the refinancing of £279m of Spirit debt last year cost an “exceptional” cash amount of nearly £50m.

As management refused to reveal the interest rate on its new £350m revolving credit facility used to fund the refinancing, it has been assumed at less than 2.5% in order to have created any value. "Given even the company’s cheapest secured debt costs circa 4%, we consider it more likely that it has destroyed circa £25m-30m of value," the analysts said.

In the Berenberg view, maintaining the dividend at current levels "is not in the best medium-term interests of the business", with the refinancing of the Spirit debt making the dividend cover "look more favourable" and to remove debt securitisation on more pubs, allowing them to be sold.

"We think both of those are indicative of the challenging financial position Greene King is in now," the analysts said, pointing to poor underlying trading and leverage at 4.2 times, making it hard to see sense in the business continuing to pay £103m of dividends a year when it will only generate free cash flow of £50-60m.

The first eight weeks of the year "may be as good as it gets" for the pubco, the analysts said, amid scorching weather and the boost from the royal wedding and the World Cup - "even in one of the best periods for the pub trade in recent history, Greene King did not achieve adequate LFL growth to offset cost increases and grow earnings".

Two and a half years into a strategic pivot, Morgan Advanced Materials is nearing a potential "tipping point", analysts at JPMorgan Cazenove believe, leading them to upgrade their rating and target price.

Cazenove sent notes to clients on Tuesday giving its "tactical views" heading into the UK capital goods reporting season, where half-year numbers are expected to be generally strong but a complex macroeconomic backdrop "makes share price moves difficult to call". First-quarter trading updates confirmed a good start to the year for most, with commentary on activity levels in the second quarter remaining solid, but a challenge comes from concerns about a slowdown "which may lead to cautious outlook statements".

On all metrics, however, Morgan Advanced Materials was currently seen as "one of the cheapest" in the analysts' European capital goods coverage.

The analysts, led by Glen Liddy and Andrew Wilson, upped their recommendation to 'overweight' from 'neutral' and increased its price target to 390p from 345p, saying chief executive Pete Raby was clear back in early 2016 when he outlined his six strategic objectives to drive sustainable profitable growth that it would be a three- to five-year improvement programme.

Progress in the first two and a half years has been "masked" to some degree, but the next 12-24 months are expected to produce more "noticeable results", and upside for the company and its shares.

Analysts at Liberum maintained their 'hold' rating and 725p target price on real estate investment trust British Land on Tuesday.

Liberum said British Land's first quarter had confirmed steady overall conditions but noted that retail pressure could provide immaterial pressure to the group's full-year earnings.

The broker felt that, although the group's occupancy had remained unchanged at 98%, gains seen in British Land's office unit appeared to have been offset by continued challenges rearing their head at its retail wing.

British Land's disposal of 5 Broadgate for £1bn, in line with book value, represented another "opportunistic disposal" in Liberum's eyes, capitalising on continued strong international demand for prime London office assets and realising value on a now dry building.

With its 50% of the proceeds, British Land has extended its prior share buyback plan by a further £200m, something the broker expects to be accretive to its net asset value by roughly 1%.

Liberum also pointed out that it felt British Land's master development agreement with Southwark Council was one of the "most significant amongst the major REITs" and holds the potential to add material value to the group.

"In a flat market, British Land continues to balance activity to deliver future value creation, while limiting its overall financial and speculative risk exposure," Liberum concluded.

Online fashion retailer ASOS rose on Tuesday as Goldman Sachs upped the stock to 'buy' from 'neutral' and lifted the price target to 7,900p from 7,100p on the back of higher revenue forecasts.

The bank said it expects sales to grow by around 24% in FY19/20, which is the top end of the group's mid-term guidance of between 20% and 25%, and reach around £4.5bn/£7bn by FY21/24. Goldman expects revenue growth to be supported by accelerating growth in the US and continued online penetration in Europe.

Meanwhile, it said that growth in categories such as beauty and activewear should help support overall growth, but these are incremental opportunities rather than a step change in the near term.

"Our analysis suggests that for every £1 of capex, ASOS has historically generated circa £7 of incremental revenue over the next three years (we reflect only circa £4 of incremental revenue in our forecasts). We also view beauty as an incremental opportunity. Amid tough competition, we expect ASOS to continue to differentiate versus incumbent and newer players (e.g. SheIn/Zaful)."

Risks to the bank's buy rating include lower-than-expected sales growth in the UK or internationally owing to execution issues, and higher-than-expected promotional activity to achieve sales growth or to clear inventory which could negatively affect gross margin.

Investec downgraded Paddy Power Betfair to 'sell' from 'buy' on Tuesday, cutting the price target to 8,010p from 8,570p as it revisited the investment case and explored the US opportunity in detail.

"We believe that an acquisition strategy would derive more value than a share buyback strategy. Furthermore, PPB is losing UK market share to GVC, William Hill and TSGI.

"We believe the group has a significant first mover advantage in the US, but short to medium upside is unsupported by fundamentals."

Investec said the new target price factors in the share buyback, the government's Triennial Review and a remote gaming duty increase of 500 basis points, among other things.

It noted that Paddy Power has guided to FY18 earnings before interest, taxes, depreciation and amortisation of £470m to £495m. However, due to the early implementation of point of consumption taxes in Australia and unguided investment in Fanduel Inc - where it expects a loss of around £10m in FY18 - Investec sees downside risk to guidance.