Broker tips: Anglo American, ITM Power, Rolls Royce

RBC Capital Markets downgraded its recommendation on shares of miner Anglo American to ‘sector perform’ from ‘outperform’ on Tuesday, slashing the price target to 3,400p from 4,100p as it pointed to rising headwinds.
The bank noted that Anglo shares are up 28% year-to-date, outperforming the sector by 14%.

“For the first time in a while we see growing headwinds that could see shares consolidate,” it said. “Still a favoured long-term exposure, with arguably the best set-up for the next 10 years, but we would look to take some profit for now.”

RBC Capital Markets has initiated coverage of hydrogen electrolyser manufacturer ITM Power with a target price of 310p.

The bank, which has a ‘sector perform’ rating on the renewable energy specialist, said ITM was “on the cusp of substantial revenue growth, and we expect its end markets to continue to be supported by energy transition related to government policy”.

However, it acknowledged that ITM’s valuation metrics “look extreme, even relative to out-of-industry peers, and cash constraints may cause headwinds”.

RBC continued: “Green hydrogen is likely to be a structural growth area through the energy transition, driven by a stronger push to limit carbon emissions globally and the rapidly falling cost of renewable energy.

“In this context we see ITM becoming an important player in the hydrogen value chain, with its PEM electrolyser technology gaining traction due to favourable characteristics versus other technologies.”

RBC concluded: “ITM offers a strong business growth case supported by healthy demand and very constructive developments on the policy front. However, an extended valuation and future cash requirements prevent us from being more constructive at that stage.”

Analysts at Berenberg selected Airbus and Rolls Royce as their ‘key picks’ within civilian aerospace, arguing that the deep restructuring such companies had withstood would drive bigger operating margins within three to five years in comparison to pre-pandemic levels.

In the case of Rolls Royce, which they labelled the ‘value play’ in the sector, they said the engineer was “fundamentally” improving its cost structure which would “generate financial results far in excess and of better quality than before. So far, so good.”

Covid-19 had seen Berenberg’s sales and free cash flow forecasts for the sector in 2022 and 2025 drop by 25%/19% and 52%/35%, respectively.

But the analysts retained a positive stance towards the sector given building travel demand and valuations that weren’t stretched.

Indeed, less restricted markets such as China and the US were showing a strong rebound, they said, with the likes of Airbus having pointed to a faster-than-expected ramp-up of the A320 and A220 programmes.

“From a low base, we expect Rolls-Royce will benefit over-proportionally from its fundamental restructuring, although all companies will derive improved business resilience and operational leverage into the upturn.”

Berenberg kept its recommendation for Rolls Royce at ‘buy’ with an unchanged target price of 150.0p.

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