Broker tips: Antofagasta, Sainsbury, Serco

22nd Nov 2013 12:20

Copper miner Antofagasta faces higher treatment and refining charges (TC/RCs) for 2014, and cost increases.Yes, the balance sheet is strong, but the company will have to invest heavily for several years. As well, softening earnings will limit the scope for special dividends, explain analysts at Investec. Recent settlements on TC/RCs are moving from around US$70/t and 7c/lb toward US$90/t and 9c/lb reflecting greater copper concentrate availability. Applying higher charges reduces the broker's valuation to 716p from 737p adding around 5c/lb in cash costs, the South African broker said. For all of the above reasons they decided on Friday to maintain their 'Sell' recommendation on the stock, describing the 15 times forward earnings multiple assigned to the shares as 'generous.'Sainsbury's shares edged slightly lower after Credit Suisse reiterated its 'underperform' rating on the stock.While the supermarket chain reported strong half-way figures last week, the broker warned of "only modest progress" in cash flow, margin and lease-adjusted returns, which are "most important to us in creating long-term shareholder value". "And these KPI [key performance indicators] could worsen if LFL [like-for-like] momentum is not sustained."Credit Suisse raised its target price from 285 to 345p, saying it predicts shares will hold-up so long as it continues to outperform its UK rivals. "The shares have outperformed recently which, given Sainsbury's recent H1 results and LFL/profit outperformance, is understandable," the analyst said. "But, we think a further step-up in performance and some material operating leverage is now required to justify a price above our 'steady-state' 345p scenario. And, if the business weakens, we see downside below 345p."Analysts at Credit Suisse today moved to raise their recommendation on shares of Serco to outperform from neutral on the back of the "apparently improving political and press sentiment over recent days" and the 17 per cent fall in its share price in the year-to-date. In their opinion the decline in its share price means that the stock price has already absorbed most of the company's near-term challenges, while the firm is likely to remain a key long-term supplier to the central government and as such supporting the company's long term growth potential.The Swiss broker highlighted how key recent events, such as the Public Accounts Committee hearing, reflects improving political sentiment towards Serco. As regards potential near-term price catalysts, Credit Suisse pointed out that the UK government reviews should be completed by early December. Full year results are due in the first quarter of 2013, it added. Their discounted cash flow-derived (DCF) price target remains at 500p. "We think that at 430.7p the risk reward looks attractive with 20% downside to our bear case and 58% upside to our bull case. At the current price Serco trades at 11.3 times 2014 estimates, representing a 28% discount to its historic median of 15.7 times," analysts Andy Grobler and Thomas Burlton said.AB