Broker tips: Inmarsat, Rio Tinto, Rentokil, Ocado
Inmarsat's rejection of a takeover approach, but not an offer, from US rival Echostar provoked a buzz among investors, with some analysts sharing the some excitement but others cynical.
RBC Capital Markets, which raised its price target from 725p to 850p, said the Echostar approach "puts Inmarsat clearly into play", with the company a "unique strategic asset" deserving of "a substantial premium".
The broker estimated Inmarsat's mobile satellite communications spectrum is worth circa £10 per share and that spectrum is "extremely important to Echostar and its sister company DISH", which are both controlled by Charlie Ergen, and would allow Echostar to use Inmarsat's spectrum and gain control of some of Ligado's own spectrum if Ligado were to go bankrupt.
RBC said counter bidders could come in the shape of satellite operators, large mobile operators or private equity. However rival satellite operators are seen as keen but somewhat hamstrung by debt, with ViaSat's balance sheet stretched and SES and Eutelsat, while both expanding fast into mobility as their core video business shrinks, but both struggling with leverage and low relative rating.
Analysts at Numis were less bullish: "We think Echostar will not follow through."
"We do not advise shorting ISAT's stock but, unless the company's value prospects are better detailed than they have been hitherto, we think shareholders should reduce holdings if the share price climbs materially higher."
After recent tinkering with its forecasts post first-quarter results, Numis's target price inches back to 430p from 450p per share.
Deutsche Bank downgraded Rio Tinto to 'hold' from 'buy' on Monday following a significant rebound for the sector through the second quarter.
The bank, which left its 4,700p price target unchanged, noted that the shares have re-rated versus peers following a successful strategy of asset sales, deleveraging and high cash returns.
"We think the medium term risks to iron ore demand will limit the re-rating potential from here. High cash returns should continue to provide valuation support; following recent divestment announcements, we have increased our 2018/19 buyback estimates from around $2.9/3bn to $4.4/5.2bn."
Deutsche Bank said that while some of the bear scenarios on rapidly rising scrap consumption are premature, Chinese iron ore import demand should peak around 2020, limiting growth potential from the majors. As a result, it has cut its iron ore production assumptions for Rio in 2021 and beyond from more than 380mt to a more gradual creep above 360 metric tons per annum.
With Rentokil continuing to strengthen its pest business through strong organic growth and acquisitions, analysts at HSBC decided to upgrade the firm to 'buy' on Monday.
As Rentokil had altered its business mix at a "much faster pace" than HSBC had anticipated to become a purer pest control player, the bank pointed to an upside in if the company continued such a transformation.
"We believe this is likely as it is consistent with management's stated strategy. If the company achieves the targeted 8-10% per annum revenue growth from acquisitions and manages to dispose of its protect and enhance businesses, the high-return and high-multiple pest control business should account for circa 80% (versus 69% in 2017) of EBITA by 2020," the analysts said on Monday.
HSBC highlighted the fact that the mix, route density and cost savings from such acquisitions should help the company to improve its margins by 100-200bps.
The bank also noted that if Rentokill was capable of maintaining its present rate of growth, aided by acquisitions, it saw a 35% potential upside to the firm by 2019, leading it to up its target price on the group from 290p to 440p.
Ocado got a boost on Monday as Goldman Sachs upped the stock to 'buy' from 'neutral' and hiked the price target to 1,160p from 540p as it assesses the global opportunity following news of the company's partnership with US-based grocery retailer Kroger last month.
"Ocado's announced partnership with Kroger was transformational in our opinion, both in the number of distribution centres Kroger is looking to start building (a commitment to 20 customer fulfilment centres versus one CFC in each of Ocado’s three previous OSP deals), and in the validation of Ocado’s Smart Platform (OSP) as an online grocery solution with a global addressable market."
"Analysis of the top 50 food retailers globally points to an addressable grocery revenue pool (not bound by existing exclusivity contracts) of over £250bn, an OSP opportunity equivalent to over 2x Kroger-sized deals," it said.
The key takeaway from the announcement of the deal was that Kroger plans to identify 20 customer fulfilment centre locations in the US in the next three years. CFCs are centralised online distribution centres owned and operated by Kroger using Ocado online grocery specific hardware and software.
Under the agreement, Ocado will fit out Kroger distribution centres with its own - owned by Ocado - robots and picking stations specific to Ocado’s online grocery solution as well as providing the end-to-end online grocery operating platform.