Broker tips: Asos, G4S, Evraz, AstraZeneca

Digital Look Sharecast | 20 Mar, 2017 13:21 | | |

asos

Goldman Sachs downgraded Asos to 'neutral' from 'buy' following a strong share price performance.

Since being added to Goldman's 'buy' list in November 2016, the shares are up 13.9% versus the FTSE World Europe up 12.4% and the bank's Retail & Luxury Goods coverage up around 8%.

GS said the company's performance has been driven by solid execution driving raised expectations for FY17 growth, which was confirmed by management’s guidance at the first quarter results.

"We continue to believe that Asos’s social engagement-driven strategy is appropriate for its target ‘20/20’ customer and that investors underestimate its ability to drive strong acquisition and retention of customers over time."

Goldman said that as regions such as the UK mature, the company has optionality on reinvesting for growth in less mature markets or allowing profitability to rise.

The bank's estimates are around 2% ahead of Reuters consensus on revenues for FY17/18 and approximately 1%-2% ahead on pre-tax profit.

GS kept its 12-month price target of 5,800p on the stock.

G4S

HSBC has downgraded G4S to 'reduce’ as it was unsure about what will emerge from the security firm’s transformation strategy.

The bank also has concerns about wage cost pressures which could become more acute in the future and so downgraded G4S to 'reduce' from 'hold', but lifted its target price to 259p from 245p.

HSBC said that ideally, valuation would be on the future recovered earnings of the business discounted back to a present value, however the company moves business lines in and out of its portfolio and discontinued segments, which makes it hard to discern trends in the business.

It also makes it makes it difficult to see what business emerges from the “transformation strategy” the company is carrying out and its effects on profits, or what multiple to apply to it.

HSBC said that G4S must make a turn on the labour it provides for its business providing guards as contracts are largely bid on a man hour basis and unbilled time, unplanned overtime and unscheduled absence are expensive, as well as extremely margin dilutive.

It said that technology can help but it remains unclear how a competitive advantage may be maintained with technology easily accessible.

The labour used by G4S, and its competitors, is largely above minimum wage levels but might not be sufficiently so to avoid ‘differential maintenance’ pressures on the cost base.

It suspects that will there will likely be cost pressures in the coming years as there has been tweaks to working practices and some technology may have helped but may have finite scope.

Meanwhile, the cash handling business is afflicted by the perception that electronic payments will erode the usage of cash, and HSBC said it had struggled to find evidence that there is a rapid movement to less cash circulating.

HSBC’s earnings per share estimates are 3.7%, 3.3% and 6% below consensus largely because they see future labour cost pressures as greater than implied by consensus and it continues to value the business on a multiple of 13.4 times 2018 earnings per share, as previously, and given small upgrades to its forecast it came to a target price of 259p.

Evraz

Citi has upgraded its recommendation Evraz to a high-risk 'buy' as it sees catalysts for the shares from Russian long steel and coking coal prices catching up with those elsewhere.

A new target price for Evraz's shares of 265p was set, up from 221p, as the rating was upgraded from 'neutral'.

Noting the jump in China long steel prices on closure of furnaces and stronger than expected construction demand, which has moved Chinese rebar to a large premium to hot rolled coil steel (HRC), Citi said it believed the Russian discount to HRC should narrow as demand picks up for Russian long steel exports.

As Evraz is operating well under capacity, it is expected to enjoy a sizeable volume rise of 0.5m tonne in 2017 as global long product markets tighten in reaction to China.

With Russian coking coal prices only now catching up with the rest of the world, Citi forecasts Evraz will see its coal segment produce a circa-$220m boost to earnings before interest, tax, depreciation and amortisation in the first half compared the second half last year, leading to a surprise EBITDA of $1.45bn for the half.

First-quarter results should show first evidence of this coking coal rebound.

For the full year, Citi forecast $1.2bn of free cash flow and upped its dividend forecast to $300m, implying a hefty 7% dividend yield.

AstraZeneca

Analysts at Berenberg pushed up their target price on AstraZeneca in anticipation of multiple blockbuster launches and lessened competitive headwinds from generics in 2017.

By year-end, the impact from its patent expires should also have dropped out from the annual comparisons, the German broker said in a research note published on Monday but dated 17 March.

Analysts Alistair Campbell, Joseph Lockey and Laura Sutcliffe PhD bumped up their target from 4,866p to 5,670p and reiterated a 'Buy' recommendation.

Dominating the outlook for the company in the very short-term were its immuno-oncology (IO) drug, Durvalumab, and its first-line lung cancer drug trial, MYSTIC.

The latter marked an important milestone, the analysts said, with lung cancer potentially adding $2.5bn of sales; nevertheless, although it was not essential for the drugmaker's turnaround it had a reasonable chance of success, they said.

Should MYSTIC fail, Berenberg's discounted cash-flow models pointed to a share price value of 5158p.

"This does not offer much upside from current levels, but also implies that MYSTIC expectations are not aggressively high. If we assume MYSTIC success, and remove our risk weighting entirely, our DCF climbs to £59.19, giving 22% upside from current levels."

Astra's pipeline and current launches might add $10bn to the top line, with IO accounting for a quarter of that.

When risk-weighted, that pipeline would help the London-based firm grow sales at a yearly clip of 8% between 2017 and 2023.

The firm would also be able to rein in cost growth , helping margins to recover and driving earnings per share gains per annum of 28%, they said.

Earnings before interest and tax (EBIT) margins were seen recovering from 17.5% in 2017 top 20.7% in 2018 and 25.1% for 2019. In 2016 they clocked in at 29.2%.

Value stocks

Strategists at Barclays reiterated their 'overweight' stance on so-called 'value' stocks in anticipation of a pick-up in euro area inflation.

Price pressures in the eurozone were set to pick-up, the broker said, pointing to its own economic research on the issue.

That would see the European Central Bank turn "increasingly hawkish" in coming months, the broker said.

However, up until now political 'de-risking' had prevented bigger capital flows into value stocks, leading exchange traded funds and active ones to remain 'Overweight' on shares of low-volatility companies, it said.

That did not mean the low volatility bubble was on the verge of collapsing just yet. Indeed, they expected to see another leg in that trade which would result in an additional 15% of underperformance in low volatility stocks which were already overvalued by 1.5 standard deviations.

"If reflation does materialise we could see low volume trade as low as 0.5 SDs as seen in 2003-07, implying up to 30% underperformance," Barclays said.

Hence, the broker reiterated its 'overweight' stance on value stocks, especially those enjoying positive earnings momentum.

It reiterated its 'overweight' on financials, consumer discretionary, industrials, technology and telecommunications.

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