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Broker tips: Glencore, Rio Tinto, Hurricane Energy, Unilever

Mon 02 December 2019 14:56 | A A A

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(Sharecast News) - Analysts at RBC Capital Markets took a fresh look at miners Glencore and Rio Tinto on Monday, adjusting their target price and upgrading their ratings on both firms as a result of rising near-term iron ore price forecasts.

With the higher price forecasts and sentiment around "resilient" iron ore likely to be "more positive", RBC thinks a neutral position on Rio Tinto was warranted in the coming months.

However, RBC noted that it still saw "considerable risks" to the

longer-term from lower iron ore prices in the second half of 2020 and a portfolio that depends too heavily upon Rio's high return on capital employed Pilbara projects to support share prices.

"We tactically upgrade to 'sector perform'," said RBC, which also raised its price target on the group from 3,700p to 3,900p.

As far as Glencore was concerned, RBC stated the group had underperformed the FTSE 350 mining index by roughly 36% since the end of 2017, when significant divergence started to show.

"Glencore's past two years have been beset by significant challenges including the Department of Justice investigations, a significant lowering of near-term expectations for its African copper assets, collapsing thermal coal and cobalt prices, and operational inertia elsewhere," said RBC.

However, the Canadian broker now calculates a 23% implied upside to its heavily discounted valuation and as such, moved its rating from 'sector perform' to 'outperform' but lowered its price target from 310p to 290p per share.

While RBC admitted that Glencore was "not for everyone", with the risk/reward scenario now improved the analysts said the firm "should not be forgotten" either.

Over at Berenberg, analysts reiterated their 'buy' recommendation and 100p target price on shares of oil and gas explorer Hurricane Energy despite the disappointing test results for its Warwick West well.

Nonetheless, while the flow rates at Warwick West were insufficient for it to be commercially viable, the analysts had only assigned a 10.0% probability to its success.

"The focus remains on Lancaster, where results from the early production scheme (EPS) continue to deliver in line with guidance," they said.

Indeed, of its 100.0p per share net asset value estimate for the whole company, the broker had assigned just 4.0p per share, on a risked basis, to Warwick.

More important would be the one-well tie-back to the Aoka Mizu floating production storage and offloading (FPSO) platform from Lancaster that was planned for 2020.

Berenberg put the odds of success for the tie-back in the Greater Warwick Area at 75.0% and had assigned it a 6.0p per share value on a risked basis.

The total value attributed to a full-field development of the broader GWA was 27.0p per share on a risked basis.

The analysts also said that they were "encouraged" by the fact that the Lancaster early production system had now been producing for six months with no water encountered thus far.

Liberum upped its stance on shares of consumer goods giant Unilever to 'buy' from 'hold' on Monday, lifting the price target to 5,100p from 4,735p following the company's shift in strategic focus.

"Unilever's recent investor days highlighted a move away from a dizzying pace of bolt-on deals towards integration, disposals and continuing digital transformation," it said.

Liberum said that focusing on reaping the rewards of newly-acquired businesses and selling off slow-growth assets is likely to transition Unilever to a mid-single-digit growth company.

It said that by slowing the pace of acquisitions and redirecting management bandwidth towards integration, Unilever can boost its top line while improving its return in invested capital.

"This is a key reason for our upgrade," Liberum said.

The broker sees scope for €2bn of cost savings a year even beyond 2020, providing firepower to reinvest and to expand margins beyond the 20% target. It noted Unilever's commitment to regular share buybacks and said this boosts its earnings per share estimates by 1.7%, taking Liberum 3% above consensus FY21 estimates.

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