Broker tips: Rio Tinto, AO World, WPP
Bank of America Merrill Lynch cut its stance on miner Rio Tinto to 'underperform' from 'neutral' on Thursday, slashing the price target to 4,150p from 4,770p as it noted limited positive catalysts in the near term.
Merrill said Rio's results earlier in the week were solid. Among the company’s catalysts and delivery in the last 12-18 months, it highlighted the capital return of $13.5 declared in respect of 2018, the exit of the "somewhat controversial" Grasberg copper asset in Indonesia and the exit of coking coal assets and the Dunkerque smelter in France. It also pointed to the group's total disposals of $12bn since 2015.
From here, however, the bank said it sees "relative less potential" for catalysts and that as a result, investors could be ready to "book" the solid performance of the shares.
"Rio’s management has indicated that the asset disposal process is largely finished and, for choice, we are starting to see a switch towards organic growth. In our view, this is necessary but it is inherently riskier than Rio's ’shrink to grow' approach to value realisation."
Merrill said iron ore is "key" and that it sees Chinese steel production in 2019 as flat or slightly lower versus last year.
"Seasonally, we are entering a quiet period between Chinese New Year (Feb 6th) and the end of China’s National People's Congress (mid-late March)," it said.
Analysts at Shore Capital reiterated their 'sell' rating on household appliances and electricals retailer AO World on Thursday, with the broker stating the UK electrical market had become even more competitive since the group's IPO back in 2014.
Shore Cap said it continued to be impressed with both the infrastructure and service-led culture that AO World has built, but its analysts again highlighted that the company remained "sub-scale", despite its investment thesis at the time of its IPO back, that it would "disrupt the UK white goods market".
"The UK electrical market remains as competitive as ever, particularly given current consumer sentiment and a more aggressive competitor in the form of Dixons Carphone, under new leadership, alongside Amazon, Argos and John Lewis," said Greg Lawless and his team.
Shore Cap noted that AO World's European operations also remained sub-scale and was projected only to move towards break-even point during the 2021 financial year.
In terms of valuation, Shore Cap valued AO World using an EV/sales, EV/EBITDA and DCF combination - which generated a fair value range of 60p-79p per share and a mid-point of 70p.
"As this suggests 31% downside versus the current share price, we reiterate our 'sell' rating," Shore Cap concluded.
Over at Liberum, analysts took a fresh look at WPP ahead of the advertising and public relations outfit's full-year results on Friday, reiterating their 'buy' rating on its stock as it noted the group's most pressing concerns already appeared to be priced in.
Liberum expects a "cautious message" from WPP on 2019, with a 0.5% dip in organic net sales during 2018 and 90bps drop in operating margins. However, with WPP shares at 8.1x adjusted FY19E, offering a guaranteed 7% dividend yield and the company having reset expectations at its Capital Markets Day back in December, the broker thinks all this "should be priced into the shares".
The broker, which did lower its target price on WPP to 1,290p from 1,375p, expects a "slow climb back" from the FTSE 100 constituent and thinks it will offer a re-run of the RELX recovery story, where the company gradually clawed its way back to market approval.
"We have made the point before that WPP has the look of a re-run of what happened with RELX a decade ago when the latter suffered a massive de-rating as secular fears combined with profit warnings and a rapid change of management derailed the stock, with the company falling into the high single-digit PE level as investors fled the name," said Liberum.
"We would see WPP as the makings of a similar story. For those investors prepared to wait, at c. 8.1x consensus FY19E Adjusted PE and a circa 7% yield, this has the makings of an attractive long-term story."
Liberum also expects WPP to be the "weakest performer in 2018" of the major agency groups.