Broker tips: Sirius Minerals, The Restaurant Group, Ocado, IQE, Sainsbury's
Berenberg lowered its target for Sirius Minerals' share price from 40p to 35p after incorporating the structure of the potash miner's long-awaited stage two financing for its Woodsmith polyhalite mine into its valuation model.
While the financing package cleared "some" of the hurdles around the project, the German broker was quick to point out that it "by no means guaranteed" the necessary funds and that Sirius remained in a "crucial" phase of securing the monies that it needed.
Berenberg was confident in the company's ability to pull-off the debt sale, albeit likely "at an elevated interest cost" and kept its recommendation at 'buy'.
More fundamentally, the broker said it remained "positive" on the project's longer-term attractions, estimating that even on conservative assumptions it could generate an internal rate of return of 15%.
Berenberg was also positive on the long-term business case for the firm's POLY4 product, saying that it was a cheaper alternative for struggling farmers to fertiliser products such as sulphate of potash and outing its potential yield benefits, particularly for higher value crops.
Peel Hunt downgraded its stance on shares of Restaurant Group, the owner of Wagamama, Frankie & Benny's and Garfunkel's, to 'hold' from 'add' on Wednesday as it argued that the stock is now fairly valued.
It pointed out that its previous 'add' rating was based on the shares being cheap, the fact that Restaurant Group had been rescued by its shareholders and the potential for Wagamama to flatter like-for-like sales for a while.
However, following a bounce in the shares price - the stock rose 2.8% in the 10 weeks to 10 March, the shares now look fairly valued on almost 7x EV/EBITDA December 2019.
Among the risks, it highlighted poor underlying trends and said that ex-Wagamama, LFL sales were only flat against a -5.6% comp over the first 10 weeks, with tougher comps ahead. In addition, the broker said its 2019 forecasts assume LFL sales rise by around 2.5%, which leaves no room for Wagamama to slow.
Bank of America Merrill Lynch has upped its price objective for shares of Ocado, arguing that the online grocer is primed for further expansion.
“Ocado’s playing field has been expanding while proving the uniqueness of its e-commerce solutions,” analyst Xavier Le Mené argued in a note. “We believe it is a question of time before it announces new countries and more customer fulfilment centres within its existing partnerships.”
Le Mené said there were 32 markets around the world which had food sales above $20bn, but Ocado was currently only in seven. “It leaves room for another 25 countries to expand in, in theory,” he argued. “Ocado will moreover continue innovating in immediacy and automatisation.”
Ocado, which recently announced a major new retail partnership with Marks & Spencer, is currently loss-making. Bank of America-Merrill Lynch believes it will break even in 2020 and that 2021 “should be the year of acceleration for the profit stream, with most of the partnerships going live. This is the first meaningful year, in our view, and a better reflection of Ocado’s profit potential in the foreseeable future.”
The bank, which has a ‘buy’ recommendation on the stock, also upped its price target to 1,630p from 1,020p.
Canaccord analysts bumped up IQE's target price from 120p to 130p on Wednesday to reflect upbeat guidance from the company's downstream customers amid rising 3D-sensing attachment rates from Android OEMs.
Analysts suggested that these rising attachment rates, along with an iPhone demand rebuild, improve visibility on the AIM traded company returning to year-on-year revenue growth exceeding 25% in the second half of the year, putting the smartphone semiconductor manufacturer back onto its roughly 20% revenue and roughly 40% earnings per share through-cycle growth trajectory.
Examples of the rising number of 3D-sensing products include Samsung phones which use the function for their QuickMeasure app, as well as Huawei’s Honor View20 phone, which can use its 3D sensor to turn the device into a motion-controlled gaming console.
While maintaining their 'buy' rating of the stock, Canaccord analysts added that several of IQE's main photonics and wireless customers have reported in-line or better results and guidance over the last 10 days, sounding confident about a demand recovery into the second half of the year.
Bank of America Merrill Lynch downgraded its stance on shares of Sainsbury's to 'neutral' from 'buy' on Wednesday, cutting the price target to 235p from 350p.
It said that following the collapse of the Asda merger, the focus has switched back to core retail, with the group flagging labour cost savings, better buying terms and own label range reset to be key drivers over the next 12 months.
However, while the recovery plan is "encouraging", the recent underperformance versus the market is a concern and growth plans carry an execution risk, BofA ML said.
Merrill said the stock trades at a 22.5% discount to the sector average, which it reckons fairly reflects the risks around delivery from the company's recovery plan. It's also in line with the stock's historic discount average to the sector.
Sainsbury's and Walmart-owned Asda agreed last month to ditch their proposed merger after the Competition and Markets Authority blocked the deal on the basis that it would leave shoppers worse off.
In its final results earlier this month, Sainsbury's said it had taken a £46m hit from transaction costs related to its proposed combination with Asda. It reported a 7.8% jump in underlying pre-tax profit to £635m but a 41.6% decline in pre-tax profit to £239m.