Broker tips: Johnson Matthey, Mitchells & Butlers
Liberum slashed its price target on shares of Johnson Matthey on Wednesday to 3,500p from 4,400p following the company’s first-half results earlier this month.
The broker said the results threw up three negative factors, despite the solid earnings before interest and tax result and reaffirmation of full-year EBIT guidance.
Firstly, it noted that net debt ballooned during the half due to rising metals prices and will take 12-18 months to recede through company measures unless platinum group metals reverse.
Secondly, it pointed out that the company guided down second-half expectations for pharma ingredients due to weakness in suboxone API sales.
Thirdly, JMAT confirmed that US truck production is now rolling over.
Liberum lifted its two-year annual net debt forecast by more than £200m and said it was assuming a more cautious backdrop for truck markets, prompting it to cut its earnings per share estimates for March 2020 and 2021 by 7% and 9%, respectively.
Still, the broker said it was "more relaxed" than other analysts and maintained its ‘buy’ rating due to "upside to fair value" and cautious optimism about a tailwind in Asia average revenue per unit in Clean Air.
Analysts at Berenberg downgraded their recommendation for shares of pub landlord Mitchells and Butlers from 'buy' to 'hold' on Wednesday, noting some significant share price strength since its initial upgrade in June.
Berenberg noted that M&B shares had risen roughly 70% since issuing it with a 'buy' rating at the midway point of the year, supported by a combination of improving operational performance and the positive read-across created for the wider pub sector by the recent takeouts of peers Greene King and EI Group.
While the German bank judged that performance to be well warranted, Berenberg also said that it had been driven almost entirely through a re-rating of the shares' valuation multiple, with only modest earnings upgrades.
"As a result, we think the shares are at least due a pause for breath," said Berenberg, which did increase its price target from 360p to 480p.
When discussing the future, Berenberg said the main upside risk remained M&B's balance sheet and free cash flow.
The analysts were expecting M&B to generate roughly £90.0m of FCF in 2020 - and expected that figure to grow at a pace of about 15% per year before a further £50.0m windfall once contributions to close the company's pension deficit cease around 2023.