Broker tips: Unilever, Frontier Developments, Antofagasta

Analysts at Bank of America reiterated their ‘neutral’ rating on Unilever’s stock on Monday following news that it had made three bids for GlaxoSmithKline’s consumer health business, telling clients they believed that upside and downside risks to the share price were “well balanced” at current levels.
On the plus side, the proposed deal would help rectify Unilever management’s excessive focus on profitability be a step in the right direction towards growing its top line, while giving it exposure to leadership in faster-growing categories.

However, BofA stated there was limited scope for synergies due to Unilever’s scant presence in consumer health, oral care and nutrition, as well as its lack of experience in over-the-counter consumer health products and possible competition concerns in oral care, as the company’s market share would be in excess of 35%.

Lastly, given the increasingly costly rejections of its offers, and the resulting increase in its projected indebtedness if it succeded, BoA believe that any potential hike in the offer price would likely be in shares or require further disposals of “sizeable parts of the business”.

The bank estimated that a £41.0bn increase in the company’s debt would push its net debt as a proportion of earnings before interest, taxes, depreciation and amortisation to 4.5-5.0 times, which would be more than its European Food/HPC peers.

Analysts at Berenberg slashed their target price on software firm Frontier Developments from 2,500.0p to 2,000.0p on Monday following two profit warnings in as many months.

Berenberg noted that Frontier Development’s shares had fallen sharply following the warnings and were now trading below pre-pandemic levels, leading it to ask two questions – was Frontier’s game portfolio and pipeline more valuable today than it was before Covid-19, and will it be able to execute on the growth opportunities available to it?

The German bank stated despite its recent issues, which were partly due to early operating challenges of the Covid-19 pandemic but more related to poor guidance, it now believes that both were yes, stating the firm had the ingredients for “material future growth”.

“Putting Odyssey aside, which was impacted by the initial working challenges of the pandemic and riddled with bugs that are slowly being addressed, Frontier’s fall from grace is more an issue of ambitious guidance than loss of development quality, in our view,” said Berenberg.

Berenberg added that in the last two years, Frontier had “substantially grown” the intrinsic value and potential for growth of its IP portfolio, by adding Jurassic World: Evolution 2, which furthered its relationship with Universal, exclusive rights to PC and console F1 management games, exclusive PC, console and mobile game rights to Warhammer Age of Sigma, and multiple publishing IP via Frontier Foundry.

UBS upgraded Chilean copper miner Antofagasta to ‘neutral’ from ‘sell’ on Monday and lifted the price target to 1,400.0p from 1,300.0p as it said the risk/reward was more balanced after recent underperformance.

“ANTO’s strong balance sheet, cost position and low-risk growth in our view means the stock offers relatively low-risk copper exposure and has historically traded at a premium to peers,” it said.

UBS said uncertainty over likely increases in tax rates for miners in Chile, capex increases at the Los Pelambres project and weak 2022 production guidance have driven material underperformance versus the copper price and copper peers over the last 12 months, eroding the stock’s valuation premium.

“We do not believe the copper price is sustainable but do not expect a near-term price collapse,” UBS said.

“After underperformance in 2H21 in our view tax increases in Chile are likely to be priced in (albeit the size of increase is unknown) and ANTO’s valuation is fair with the stock discounting a copper price of $3.60-4.00/lb, 10-20% below spot.”

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