Broker tips: SSE, British American Tobacco, SABMiller
Energy company SSE has been downgraded by Credit Suisse due to lower gas prices and recent government moves increasing the risk around renewable subsidies.
Beverages
22,007.74
17:09 25/04/24
British American Tobacco
2,337.00p
17:05 25/04/24
Electricity
9,976.62
17:09 25/04/24
FTSE 100
8,078.86
17:14 25/04/24
FTSE 350
4,434.34
17:09 25/04/24
FTSE All-Share
4,387.94
16:49 25/04/24
SABMiller
4,494.50p
08:34 05/10/16
SSE
1,650.50p
16:44 25/04/24
Tobacco
26,659.61
17:09 25/04/24
Credit Suisse cut what it admitted was a "solid performer" to a 'neutral' recommendation, with its target price trimmed to 1,600p from 1,700p.
Due partly to lower gas prices, the Swiss bank cut its EPS estimates by circa 6% in 2016, by roughly 9% for 2017 and around 6% in 2018.
CS said it saw just 12% total return upside, in line with the sector, and said recent government moves "have increased risk on renewable subsidies that is not reflected in SSE's share price".
The UK government decided to remove the Climate Change Levy exemption for renewable electricity generated after 1 August 2015.
While SSE generation fleet and energy supply business reduces sensitivity to gas and coal, from here on, "the key risk is rising rates", analysts said.
This is because the long-duration nature of SSE means each 50 basis points move on discount rates has a consequent near-6% of equity value.
Morgan Stanley upgraded its price target for British American Tobacco to 3,750p from 3,650p, keeping the stock at ‘equalweight’ as it took a look at the tobacco sector.
MS said improved 2015 results in global tobacco reinforce its confidence in long-term targets and, despite ongoing FX pressure, should support relative valuation versus US peers.
As far as British American Tobacco is concerned, the bank expects a positive message from the company at its 21-23 September investor update, highlighting the group’s ongoing margin progress.
The bank said BAT has delivered arguably the most consistent growth profile in global tobacco during the past several years, with 6-9% constant-currency EBIT growth supported by its strong emerging market exposure, robust pricing realisation and consistent delivery of 50-100 basis points of annual margin expansion.
MS said it will also be looking for a heightened focus on BAT’s diverse, consumer-led next generation products portfolio, which now includes Vypee-cigs and the Voke inhaler, and should incorporate heat-not-burn technologies by year-end.
Still, the bank’s preferred stocks in the sector remain Philip Morris International in the US and Imperial Tobacco in Europe, both of which it rates at ‘overweight’.
RBC Capital Markets upgraded SABMiller to ‘sector perform’ from ‘underperform’ and raised its price target to 3,800p from 3,100p on Wednesday’s news of an approach by AB Inbev.
The Canadian bank said its new price target is derived assuming a multiple of 17 times prospective EBITDA and including a slight discount to account for the risk the deal doesn't materialise.
RBC said it had not predicted this move coming.
“We had been convinced by AB Inbev’s management arguing that they were focusing on accelerating organic revenue growth -although they were careful not to preclude M&A.”
It said that for all the obstacles – different cultures, incomplete ownership/control of some key businesses , potentially conflicting soft drink bottling relationships and debatable geographic attractions – AB Inbev seems to have decided that this last transformational deal is one it cannot afford to miss.
RBC said AB Inbev is the best company at acquiring a business , applying tight cost controls and extracting synergies.
“If we look at the acquisitions of Modelo and Anheuser-Busch, we estimate AB Inbev was able to extract synergies in excess of 20% of sales for the former and around 17% for the latter,” it said.
In the case of SABMiller, the bank said it was already an efficient business and synergies of around 15% of sales are more realistic.
RBC retained its ‘outperform’ rating on AB Inbev.
At 1214 BST, SABMiller shares were up 0.3% at 3,625.50p.