Broker tips: Elementis, 3i
Berenberg raised its target price on chemicals firm Elementis from 180p to 200p on Wednesday, stating that supply and demand in the speciality talc market was likely to improve over the next few years.
Berenberg said of all the headwinds that had beset Elementis' shares over the last two years, the announcement of the acquisition of talc producer Mondo Minerals had easily been the "most severe", even when allowing for cyclical headwinds underlined in January's profit warning.
The German bank took the time before Elementis' 2019 full-year results on 3 March to review the market for talc and stated that supply/demand in the speciality talc market looked set to improve over the coming years and added that there was even scope for prices to rise at a faster rate than the historical 1-2% per annum.
"Given a gradual tightening of global supply/demand in speciality talc and the litigation-induced bankruptcy of the US talc unit of market leader Imerys, there could be scope for 3-4% pa price increases over the next years. 4% pa increases to 2022 would drive up our base-case 2022 group EBIT forecast by over 10%," said Berenberg, which also reiterated its 'buy' rating on Elementis.
Berenberg did cut its underlying earnings estimates for 2019-21 by an average of 10%, reflecting lower margins in chromium and antiperspirant active ingredients but noted that both headwinds appeared "temporary".
Analysts at Morgan Stanley hiked their target price for shares of private equity and infrastructure investor 3i from 950.0p to 1,300.0p after taking a fresh look at its major assets, especially in retail.
They also upgraded their recommendation for the stock from 'equalweight' to 'overweight'.
Having conducted a discounted cash-flow analysis of Action, Europe's largest non-food discount retailer, they estimated that 3i's stake was worth 469.0p, or 82.0p more than the net asset value estimated by 3i itself using a multiple-based approach.
High-teens growth in Action's earnings before interest, taxes, depreciation and amortisation would also support double-digit earnings growth at the group level for 3i, they said.
Excluding Action, a sector valuation suggested that the 11.0 times EBITDA multiple used by 3i was "conservative", with valuation supported by 3i's healthcare assets, not least given the 25.0-50.0% premiums that strategic buyers typically pay.
As well, the investor's 13.0% implied cost of equity, versus 9.0% for peers, more than covered the extra risk from its balance-sheet driven business models, versus peers who used third-party funds resulting from the "potential for greater volatility in a downturn", Morgan Stanley explained.
The analysts added: "Non-cyclical exposures, unlevered group balance sheet and healthy distribution provide downside protection."