Broker tips: Croda, InterContinental Hotels, Sirius Minerals, Centamin
Croda International was under the cosh on Tuesday as UBS downgraded its stance on the shares to 'neutral' from 'buy', as it argued that the stock's multiple was now fair and 2019 growth is likely to be weighted to the second half.
The bank noted that the shares are now close to its target price, which it upped to 5,500p from 5,300p.
"The 2019E price-to-earnings of 26x and free cash flow yield of 3% look fair valuation metrics in the context of Croda's portfolio (75% of group EBIT comprising consumer and life science actives and 25% industrial-facing products) and peer valuations," it said.
In addition, UBS highlighted potential headwinds for the first half of 2019 - for which results are due on 24 July - and said that it now relies less comfortably on second-half growth than previously.
UBS noted evidence of a material slowdown in the US cosmetics market. It also said there are two other issues to consider for the short-term earnings per share growth trajectory.
"1) Croda's crop care business could see some adverse fall-out from US weather disruption; 2) the US bio-surfactants plant has not restarted and, whilst idle, losses are accruing to the tune of £2m per quarter (3% to EPS on an annualised basis)."
Analysts at UBS also downgraded their recommendation for shares of InterContinental Hotels from 'neutral' to 'sell' on Tuesday, stating the group's current valuation appeared to be "at odds with rising headwinds".
While UBS acknowledged that IHG was "one of the best of breed hoteliers" and felt "no surprise" that it was so highly rated by the market given the quality of its brands, pipeline, strong execution and management team, its analysts nevertheless highlighted the "unattractive risk/reward" on offer in the stock given the recent expansion in the group's valuation multiples.
The Swiss broker pointed to slowing revenue per available room trends and a pipeline which looked set to create further RevPAR headwinds as its reasoning to cut growth estimates for IHG by 3% per year, which was above the 2% priced in by the market and noted that IHG's 15x multiple was "above historical averages" despite earnings momentum having moved sideways to slightly down.
UBS did note that IHG was "geographically well placed" with a strong US and growing Chinese presence; however, while it praised its pedigree, UBS was cautious that slowing US data and sluggish Chinese RevPAR was "not compatible" with the group's currently "stretched valuation".
"We believe the market is pricing in 3% RevPAR growth pa through 2023 vs UBSe 1.4-2.0%. We think the current EV/EBITDA multiple (c15x 2019e) does not reflect the potential risk of a slowdown in the US RevPAR or Chinese cycle. Furthermore, based on the current share price the shares are attributing c50% of the current valuation to long-term growth, vs 10-50% historically," said UBS analysts.
In addition to dropping their recommendation for the firm's shares to 'sell', UBS also dropped its target price on IHG from 4,700p to 4,500p.
Analysts at ShoreCap sounded an upbeat note on the prospects for Sirius Minerals, the outfit developing the world's largest polyhalite deposit, in North Yorkshire.
To back up their case, they pointed to the fact that construction of the North Yorkshire mine was on track to produce its first polyhalite "on time and in line" with the approved budget, with "good" progress having been made on all aspects of the upcoming $3.0bn senior debt sale.
The debt sale was still seen going ahead in September 2019 "if not earlier", they said.
Their expectation was that it would rive a "major" re-rating in the share price, as it was the "key" to unlocking the company's "vast" value.
Yes, the company would remain various years from turning cash generative, but as it progressed towards production it should become progressively derisked and "enjoy significant value uplift".
Under their base case assumptions, the miner's end-2019 net present value using an 8% discount rate was pegged at £6.3bn or 65p per share, or 40p a share on a risked basis.
Berenberg has reiterated its ‘hold’ recommendation on Centamin, but said there remained potential for the gold producer to beat forecasts, highlighting the importance for the company's outlook of what it expected to be the imminent release of longer-term guidance for its flagship Sukari mine.
Berenberg said that Sukari was a “large-scale, high-margin gold mine” but that “the shine has come off this reputation given its recent performance.”
The bank continued: “There has been extraordinary grade volatility at both the open pit and underground operations through the last 12-to-18 months. The first quarter update, however, showed that the company is starting to get on top of these issues and it delivered a better-than-expected first-quarter performance.
“A major marker will be the imminent release of longer-term guidance for the Sukari deposit, which will give investors greater certainty on the future mine plan. Delivery on this plan in the second-half should start to rebuild investor confidence in the outlook for underground grades and management’s ability to optimise performance at Sukari.”
Berenberg has a 110p price target on Centamin, up marginally from 106p after it increased its gold price forecast. But its analysts conceded there was "potential for more positive outlook” if the company delivers stronger guidance.
“In the short term, the greatest potential [to beat our forecasts] is if the company announces better-than-expected mid-term operating guidance expected with the interim results. Longer-term potential comes from the emergence of a mine development project from the West African exploration.”