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Broker tips: Thomas Cook, Rio Tinto, Anglo American, BHP

By Iain Gilbert

Date: Friday 17 May 2019

(Sharecast News) - Thomas Cook was under the cosh again on Friday a day after its shares tumbled on the back of a profit warning, as Citi downgraded it to 'sell' from 'neutral', arguing that the stock is basically worthless.
Thomas Cook fell sharply on Thursday after it said losses before tax widened to £1.46bn in the first half of the year from £303m the year before amid "challenging" conditions, and warned over second-half earnings. The group said the loss reflects a £1.1bn non-cash impairment of historic goodwill, largely related to the merger with MyTravel in 2007 which it has re-valued in light of the weak trading environment.

Stripping out the impairment, the underlying earnings before interest and tax loss increased to £245m from £170m.

Following the results, Citi slashed its price target on the travel company to zero from 28p, as it said option value is the only thing left in Thomas Cook equity. It said the outlook for FY19 was "significantly" weaker than expected, with guidance for underlying earnings before interest and tax below the second half of 2018.

Citi said that FY18 net debt of around £750m "implies zero equity value".

"We cut our underlying FY19E EBIT forecast from £221m to £163m (-26%) which drives underlying earnings per share -74% to 1.2p," the bank said.

"We fear that news of the £1bn write-down and the 'material uncertainties' comment from the auditors will unsettle consumers and drive further weakness in bookings (currently -12%).

"Although the group has longstanding hotel partners which have been supportive we fear that further weakness in the bonds/shares may also cause them to seek to tighten payment terms."



Analysts at Liberum took a fresh look at the mining sector on Friday, double-upgrading the likes of Rio Tinto, Anglo American and BHP to 'buy' as they outlined a "stark change" in their near-term forecasts for iron o

Following an analysis of the source of iron units that have fed the gap between weak Chinese iron ore imports and record crude steel production in China over the past year, they now saw iron ore prices averaging $90 a tonne over the first six months of 2019 and $110 per tonne during the second half of the year.

In fact, they now saw a risk that iron ore prices might shoot past $110 per tonne in the back half of 2019.

The investment bank pointed out how the Chinese steel industry has had to increasingly rely on unsustainable sources to provide its iron units, despite a rapidly growing recycling industry and accelerating scrap usage.

Nevertheless, for the near-term they retained a cautious stance on Chinese end-user demand.

And while the credit cycle was turning - with early signs similar to the last three major monetary stimulus - its analysts believed that a repeat in the size of the credit growth as seen in the past three cycles was "unlikely", but said that trade war pressures increased the possibility of "more accommodative monetary policy, which tends to be investment driven and more metal intensive than exports."

At an individual company level, Liberum double-upgraded Rio Tinto from 'sell' to 'buy' and hiked its target price on the group from £33 to £55, forecasting a full-year EBITDA of $28bn for the group, 40% above consensus estimates.

For Anglo American, Liberum saw the firm disproportionately benefiting from disruptions to the seaborne iron ore market from both a price perspective and lower freight rates, leading it up it from 'sell' to 'buy' also and raise its price target from £14 to £22.

As far as BHP was concerned, Liberum raised it from 'sell' to 'buy' and upped its target price from £13 to £20, forecasting EBITDA of $30.5bn for the year ended June 2020, 19% above consensus.

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