Broker tips: Experian, London Derwent, InterContinental Hotels, Acacia Mining
Credit Suisse downgraded its stance on credit-checking firm Experian to 'neutral from 'outperform' on Tuesday and removed the stock from its focus list, as it said the current price is reflecting the growth potential of the business.
CS said Experian is an "excellent" cash generative growth business with strong short and long term prospects. However, at 29.5x price-to-earnings and 3.5% free cash flow yield, this is reflected in the price.
It noted that the shares have re-rated relatively as organic growth improved from 0% in Q3 FY15 to 10% in Q4 FY19. CS expects organic growth to slow in FY20 and said this will create a "challenging" environment for further re-rating.
"The longer-term outlook remains positive with strong underlying markets and a raft of new market opportunities to support growth," it said, adding that earnings should be boosted by modestly rising margins, share buybacks and M&A
The bank upped its price target on the stock to 2,360p from 2,250p due to the impact of translating US dollar earnings into a sterling share price at lower rates.
Downside risks include weakening US credit markets and data security, while upside risks include accelerated growth in new market verticals, opportunities from positive data in Brazil and market share gains in existing markets supported by new products, CS said.
Barclays has cut its recommendation on London Derwent, despite upping its price target, pointing to a number of factors undermining the capital's otherwise strong office market.
The bank said that the London office market was performing well: “Tenant demand and investment volumes have performed strongly, defying expectations post the June 2016 European Union referendum.”
But it added: “However, despite low vacancy levels, supply remaining controlled and the aforementioned strong take-up, rents have remained flat. Furthermore, yields remain at record low levels.
“While we see no clear reasons for the market to change, and therefore we again become sequentially less bearish on the outlook for London offices, we continue to see balance of risks asymmetrically skewed to the downside.”
Barclays believes Derwent's two new developments will add around £32m worth of rent, equivalent to 18% of the current rent roll, “which will continue to drive earnings growth, although disposals will offset part of his impact”.
But it added: “Our earnings per share forecasts reduced by up to 20% due to lower like-for-like rental growth assumptions and lost rent on the assumed development pipeline. We forecast net asset value, EPRA EPS and DPS compound annual growth rate of 2.1%, 3.5% and 7.4% respectively.
“Despite our NAV upgrades, which see our price target increase to 3,000p, the low TARs we forecast mean the strong total shareholder returns year-to-date of 14%, and relatively slim 17% discount to full-year NAV, in our view, do not warrant a higher rating compared to Great Portland and we downgraded to 'underweight'.”
Analysts at Barclays also downgraded their recommendation for shares of InterContinental Hotels Group to 'underweight', telling clients that the then current "peak" price-to-earnings multiple the shares were trading on ignored the downside risks from a potential macroeconomic slowdown.
The current economic expansion was now in its tenth year and business confidence, a key lead indicator, had been slowing and the leisure outfit was operating in a "highly cyclical" industry.
"When RevPAR declines, the falls tend to be significant (-16% 2009) and the de-ratings even more so - even for asset-light hotel groups," they cautioned.
Yes, the company's franchise model meant leverage was lower than in the past, they conceded.
"We still see 36% downside to the current share price in a recession scenario. This compares with 18% upside potential in our upside case. We see risks skewed to the downside and we cut to UW."
They had a target price of 4,400p on the shares.
Analysts at Berenberg upgraded their recommendation for shares of Tanzania-focussed gold miner Acacia Mining from 'sell' to 'hold' on Tuesday, highlighting the potential to reap increased value even beyond its own forecasts.
Following Barrick Gold's indicative offer for Acacia on 22 May, the takeover code gave the firm until 1700 BST on Tuesday to announce a firm offer for Acacia or to reveal that it did not intend to make an offer.
Berenberg pointed out that, based on the current share price for Barrick, the indicative offer implied a 173p per share valuation for Acacia - well below its new 224.0p price target (previously: 214.0p) and at the low end of its 158p-245p valuation range.
As a result, the German bank outlined three potential scenarios for minority shareholders to consider.
First, with minority shareholders having publicly shown their lack of support for the current indicative offer of a 0.153 exchange ratio, there was a broad consensus that this was "an opportunistic offer that is set at the lower end of the valuation range for the business".
So if the offer was formally made on the same terms, then the minority shareholders could either take up the offer - which Berenberg said currently seemed "an unlikely outcome" - or wait for the resolution of the national arbitration case.
Second, given Barrick chief executive Mark Bristow's previous deal track record, Berenberg also thought it unlikely that the group would increase its exchange ratio, as he was known for not paying a premium in M&A.
Lastly, if the Barrick offer were to fall away, Berenberg said the company would likely have to hold out for a negotiated settlement of its historical tax dispute and the concentrate export ban with the government of Tanzania and, given the recent letter from the government indicating its unwillingness to sign a settlement while Acacia is involved in the assets, the analysts highlighted this as "the least attractive outcome for minority holders".
All in all, Berenberg said: "The indicative offer appears opportunistic, and it came soon after Barrick announced that it is nearing a settlement with the government; we, therefore, question the fairness of the offer at a time when Barrick is the only shareholder with the ability to assess the fair value of the company. We would hope that Barrick releases the detailed terms of the potential settlement in conjunction with making a firm offer."