Broker tips: TUI, Anglo American, Rio Tinto, Capita
Berenberg downgraded its stance on shares of TUI to ‘hold’ from ‘buy’ on Thursday, slashing the price target to 950p from 1,200p.
"In our view, TUI is making a strategic error in pursuing further avenues of growth rather than focus on its vertically integrated offering following the investments in hotels and cruises," it said. "This will leave opex and capex at inflated levels for the medium term, with around €200m more earmarked for next year and additional investment to follow.
Despite its concerns, the bank said there was no escaping the "significant" value encased in the joint venture with Royal Caribbean Cruises and Riu, which when tied with the prospect of a windfall from Boeing, leave it neutral on the shares. However, Berenberg added that it would be a seller into strength from here.
Berenberg said excluding the impact of the grounding of the MAX, TUI has failed in its efforts to grow underlying earnings before interest, taxes and amortisation as planned.
"As the company embarked on its strategy after the buy-in of the TUI Travel minorities, it anticipated a 10% compound annual growth rate in underlying EBITA through 2020. This looks set to be wildly optimistic with a CAGR closer to 3% excluding the MAX impact, and half the target if adjusted for currency."
HSBC downgraded its stance on Anglo American and Rio Tinto on Thursday, saying sector valuations were no longer cheap following a strong run in the share prices.
"The strong share price performance and normalising valuations, along with an average declining near-term earnings profile leads us to re-evaluate our views on the UK diversified miners," it said.
"Copper is trading around fundamental support levels following a circa 8% recovery to nearly USD6,200/t (USD2.80/lb) and we believe upside is limited as positioning has already moved and we see the market transitioning to surplus from 2021e.
"While we see near-term iron ore price support, we maintain our view of reducing market tightness in the coming years and for prices to revert back towards marginal cost levels in the mid-USD60s."
The bank downgraded Anglo American and Rio to ‘hold’ from ‘buy’, cutting the price targets to 2,300p from 2,350p and to 4,630p from 4,725p, respectively.
It said Anglo and Rio are the two best-performing global diversified miners, up around 30% year-to-date in US dollar terms. HSBC reckoned the shares are fairly valued at current levels, hence the downgrade.
"Our over 10% average forecast annual iron ore price decline in 2020/21e leads to a declining earnings profile, particularly at Rio, and resulting in lower free cash flow generation as capex spending also rises.
"Anglo’s more diversified asset base and favourable platinum group metals exposure provides for a more stable earnings profile. These companies are in top shape with robust balance sheets and we expect shareholder returns to remain a key feature. However, we see limited near-term catalysts and upside from current levels."
Capita was under pressure on Thursday after Deutsche Bank downgraded its rating on shares of the outsourcer to ‘sell’ from ‘hold’.
The banked noted the 15% rise in the share price since the election results and said that while a 5-year Tory government is a "theoretical positive", UK outsourcers have generally fared better when the government has increased spending materially as a proportion of GDP - something that is unlikely to happen.
Deutsche pointed out that under the Conservatives' spending plans 2023-24 departmental spending is due to increase by 11% over the four years from 2019-2020 or a compound annual growth rate of just 2.6%.
"This will barely lead to any increase in spending to GDP, and outside of Health the increase is closer to only 1.5% and is front-end-loaded," it said.
DB, which lifted its price target on the shares to 155p from 140p, said that while the fiscal backdrop is helpful, there will be no sea change in expenditure, "given we are only modestly below the 50-year average of government managed spend to GDP".
"To believe a Conservative government will materially increase this, even given the likely political imperative to support new Conservative voters in previous Labour voting constituencies, is, in our view, a bit of a stretch."
Deutsche Bank also argued that Capita is now priced as though it is largely fixed.
"Capita is trying to reposition itself and is midway through a 5-year transformation and at the same time is trying to hit free cash flow targets put forward at the time of the 2018 rights issue. In our view, the current valuation takes into account cost savings potential but doesn't take into account ongoing revenue risk from price deflation revenue attrition or the scale of costs we see as likely needed to create a ‘technology enabled business process outsourcing business’."