Broker tips: Sainsbury's, Rathbone Brothers, Rio Tinto, Crest Nicholson
Sainsbury's takeover of Asda could get competition clearance but much about how the deal will play out remains unclear, Shore Capital analysts said.
The bosses of Sainsbury's and Asda, Mike Coupe and Roger Burnley, were questioned by MPs on 20 June. Members of the environment, food and rural affairs committee asked how proposed 10% price cuts for everyday items would affect suppliers.
From an industry perspective more precision is needed on how the price cuts will be achieved, the Shore analysts said, maintaining their ‘hold’ rating on Sainsbury’s shares.
The deal faces widespread opposition but the Competition and Markets Authority will decide. "Sainsbury’s and Asda’s management speak very confidently and they are expensively advised” on competition matters," Shore said.
Sainsbury’s and Asda said small UK suppliers would not bear the brunt of the proposed price cuts but the analysts questioned whether big international suppliers would be happy to do so.
The analysts cast doubt on claims that Amazon was a competitor to the supermarkets. "We have rarely if ever seen Amazon flicker on the radar of grocery market share."
"The regulatory process is one thing, merging two businesses that must compete in public and collude in private could be the most challenging feature of all of this whole exercise, should the CMA permit it to go through,” the Shore analysts said. “We do not sense that Mr Coupe will be the person that ultimately has to be accountable on this front as this is some years away."
Analysts at Canaccord Genuity believe Rathbone Brothers' recent acquisition of investment manager Speirs and Jeffrey was a "timely and important one" for the firm.
Coming as organic growth through traditional routes had become harder to come by and various growth initiatives put in to play were still at a relatively early stage, the broker highlighted several key points of the deal on Thursday.
Canaccord said that Rathbones would benefit from an increased scale, with combined funds under management of more than £44bn and potential revenue synergies given the conversion of advisory to discretionary funds.
"We believe it is noteworthy that the cultural and client fit of the acquisition were among the most important factors cited by management. Rathbones has a good track record of acquiring firms, fully integrating them and retaining the majority of acquired funds," Canaccord's analysts said.
Alongside these factors, Canaccord believes the acquisition also ticks all the right quantitative boxes.
"We believe the deal should deliver EPS accretion even if haircuts are taken to our base case assumptions of fund retention, revenue synergies or cost synergies. The structure of the consideration, in particular, the significant share-based earn-out component, aligns the vendors with Rathbones' shareholders from a value creation perspective and thus de-risks the acquisition," the broker said.
At this stage, Canaccord did not update its forecasts to reflect the impact of the acquisition. However, it adjusted its valuation to capture the estimated value of the deal.
Canaccord arrived at a new 2,830p target price for Rathbones, up from its previous 2,705p mark and retained its 'buy' rating.
HSBC upgraded Rio Tinto to 'buy' from 'hold' and bumped the price target up to 5,100p from 4,700p saying it sees the company as the leader in technology adoption with autonomous mine and rail operations driving sustainable productivity gains.
The bank pointed out that Rio has the second highest earnings before interest, taxes, depreciation and amortisation margin of the diversified miners and, along with BHP Billion, is seen as one of the quality companies in the sector.
HSBC said that with more than half of its discounted cash flow value in iron ore, and a recent complete exit from coal, it lacks the diversity of the other miners, but this is offset by the inherent quality of its Pilbara iron ore assets and low-cost aluminium operations.
It said the company has a strong integrated aluminium business, but its copper business is struggling, namely its interest in Grasberg, which is under threat from the Indonesian government’s plans to indigenise the ownership structure. In addition, it has an expansive portfolio of other assets, some of which are earmarked for disposal.
"Having the sector's strongest balance sheet and using the proceeds from its coal disposals, we think further share buybacks (in line with its stated strategy) are likely to be announced. Given its asset quality, like BHP it trades at a premium to the other LSE diversified miners."
Crest Nicholson was on the rise on Thursday as Liberum initiated coverage of the housebuilder at 'buy' and with a 528p price target, saying the stock’s long-term attractions are undervalued.
Liberum said the de-rating in the share price after some margin erosion in 2018 has been overdone and the stock now offers "extreme value".
Crest Nicholson's shares were strong performers from the IPO in February 2013 until around May 2017. They rose around 185% in that period, beating the market by 132% and the sector by 17%. Since then, however, they have underperformed against the market and the housebuilders as margin expectations for 2018 have fallen from 20% to 18%.
"We expect profit growth to resume as margins stabilise and geographic expansion drives output growth," it said, noting that the long-term attraction is that the housing shortage is most acute in Crest’s regions.
"The shares look very over-sold on 1.0x book, yielding 9% and on only 6x price-to-earnings ratio in spite of earnings per share growing again from 2019."
In addition, the brokerage pointed to Crest's "attractive" business model, with relatively high returns earned at lower than average risk, as some land buying terms de-risk larger sites. It also said Crest adds value by developing out larger sites and by using strategic land.