Broker tips: IAG, Unite, Ibstock, M&S
JPMorgan Cazenove reiterated British Airways and Iberia owner International Consolidated Airlines Group as its 'top pick' in the European airlines sector on Monday, rated at 'overweight', noting 70% return potential.
JPM noted that the shares fell 22% in the three months leading up to its results last week due to profit warnings from the likes of Ryanair and Lufthansa, Brexit worries and the threat of strikes by BA staff. However, the group's second-quarter results were "very solid", JPM said, as it delivered earnings before interest and tax 5% ahead of company-compiled consensus and reiterated its FY19 guidance.
JPM increased its FY19E EBIT and earnings per share estimates by 2%, staying slightly below guidance "to be prudent". It also trimmed its FY20-21 EPS estimates by 3-4% per annum, "just to put some buffer in for uncertain times".
"Given IAG's superior margins and less exposure to the troubled European short-haul market, we think IAG is significantly undervalued," it said.
As far as Brexit is concerned, JPM said IAG has some "levers it can pull" in the event of a hard exit.
"It could immediately retire older wide-body aircraft that are close to fully depreciated; it could return short-haul aircraft on lease; and it points out that circa 50% of revenue is not denominated in sterling."
Barclays initiated coverage of student accommodation provider Unite at 'overweight' with a 1,200p price target on Monday, highlighting three key reasons to be "fundamentally bullish" on the UK student housing market and the company itself.
Firstly, the bank pointed to a dual-layered supply and demand imbalance. It noted a "material" mismatch between application and university acceptance numbers and said Brexit risks were "overplayed". It also said that student demand exceeds the supply of purpose-built student accommodation.
Secondly, Barclays said it reckons the supply shortage will remain in place generally across the UK and that Unite has a "strong history" and expertise in sourcing and delivering developments.
Thirdly, the bank said Unite offers investors "a best-in-class operational platform and market-leading scale through which it can amplify the returns available from the positive market fundamentals".
Analysts at UBS upgraded Britain's leading brickmaker Ibstock from 'neutral' to 'buy' on Monday, stating the despite recent downgrades, risk-reward was now "skewed to the upside".
UBS said the core fundamentals of the UK brick industry, which makes up 85% of Ibstock's underlying earnings, remained "compelling", with demand exceeding supply "by around 15%", which has led to high levels of margins and returns over recent years.
While the Swiss broker noted it did not see a material upside to these returns, it believes the downside risk was also "relatively low".
UBS noted Ibstock's concrete business had been the source of downgrades after its interim results when the broker cut earnings per share estimates by around 6% on average over 2019-23.
"On 10.5x 2020E P/E, 7.8% FCF yield and 7.6x EV/EBITDA we think shares look attractive now so we upgrade to 'buy'," said UBS.
However, UBS highlighted that risks to its call came in the form of a hard Brexit scenario and potential pressure on multiples, though it said a strong balance sheet and S&D imbalance partly mitigated these.
"With the brick operations running at high utilisation levels, focus will be on how to generate incremental growth over the mid-term. Additional brick capacity could be a route towards this: over the next 2 years the focus is on unlocking capacity through de-bottlenecking initiatives which should unlock 4% additional capacity at a cost of £25m, based on company guidance."
UBS, which lowered its target price on the group from 270p to 260p, also thinks more bolt-ons were likely in the future to complement Ibstock's product suite and said that in the medium term, a new greenfield brick facility could also feature, although it believes this was "likely an event for 2020".
Analysts at Morgan Stanley resumed their coverage of Marks & Spencer at 'equal-weight' with a 230p target price, telling clients that they remained optimistic around the company's long-term turnaround potential.
However, the nearer term risk-reward profile "doesn't look very appealing", they added.
Regarding the company's turnaround, the market was underestimating the "scale of change" underway and the probability that the fashion retailer would ultimately be successful.
Having said that, the joint-venture with Ocado was based on the erroneous assumption that the firm needed to compete in online food in the first place.
Management's recent decision to slash the dividend payout also "significantly weakens" the investment case, Morgan Stanley said.
Instead, the broker had believed that investors would be content as they waited for the turnaround to take hold and that the dividend cut might be a signal that management is anticipating a "significant weakening" in cashflows.
"There is a chance that some 'green shoots' begin to emerge in 2020, but we think investor scepticism on M&S is such that the shoots will need to develop almost into fully-grown trees before the market will be prepared to price them in."
Morgan Stanley also noted how data from Markit was showing a short base of almost 10% in the shares, which while down from its peak remained "well above" the average for the UK.
"We think the market is already bearish enough on M&S. But, on a 12-month view, we are struggling to identify much of a Buy case either."