Broker tips: Genus, United Utilities
Animal genetics specialist Genus got a boost on Tuesday as Liberum upgraded the stock to 'buy' from 'hold' and lifted the price target to 2,500p from 2,500p.
The broker said the upside risks to mid to long-term estimates for the company give it the confidence to upgrade, despite short-term headwinds from African Swine Fever (ASF) in China and the high valuation of the shares.
Liberum argued that while ASF is causing a short-term hit to PIC profits in China - £3m in the first half of 2019 - it will cause Chinese and global pig prices to soar. It noted that the Chinese piglet price has jumped in the last few weeks.
"The vast scale of Chinese import demand will trigger substantial global hog production expansion for which Genus is in prime position to benefit," it said.
Liberum also said that ASF will likely drive the modernisation of China's hog industry, as it did in Russia. "This would catalyse huge growth for PIC," it said.
In the broker's report on Genus in February last year, it highlighted a 10-year +£40m EBIT opportunity for Genus in China.
"ASF brings the opportunity closer. It will require governmental legislation and incentive schemes, which we expect will come once the scale of China's pork production short-fall becomes obvious."
It pointed out that when ASF was first reported in Russia in 2007, back-yard farming made up around 50% of Russian pork production. Now it is about 15%, and Genus’s market share has risen from 8% to 38% of the top 20 producers.
Analysts at Citi downgraded United Utilities to 'neutral' on Tuesday after the water group reached the bank's target price.
As far as Citi was concerned, with United's shares now trading close to its justified regulatory asset value premium, the bank felt the firm was now "fairly valued".
From a regulatory perspective, barring any unexpected movement on United's final allowed weighted average cost of capital and its operational targets, Citi believes it now essentially has regulatory clarity, "to a large part, until 2025".
"For us, United Utilities must now work to deliver what appears to be a set of challenging cost reduction targets, reducing the historic costs by 20% in order to meet its forward looking cost targets," said Citi.
The analysts also noted that while the UK political landscape and public opinion remain "fluid", the recent fall in popularity of the Labour Party in the opinion polls had also highlighted the risk of nationalisation and taken much of those concerns away, "at least for now".
In addition to the downgrade, Citi issued United with a new 12-month target price of 878p.