Stocks to watch: Tui, Umicore, Royal Mail, Pets at Home, Salzgitter

Tuesday 13:30 BST

What’s happening

● Tui hit a seven-month high on a reassuring trading update. Summer trends were as expected, with the holiday company’s full-year guidance unchanged. An improvement in late bookings reported last month had continued although management’s update on next year was cautious to reflect airline overcapacity, Brexit uncertainty and grounded Boeing jets.

“Today’s update serves to highlight what a different business Tui has become: hotel and cruise assets generate strong and stable cash flows and the capital structure is fit to manage the working capital strains that ultimately did for its one-time peer Thomas Cook. How much Tui benefits from Thomas Cook’s demise will depend on how capacity gets redeployed. Precedent dictates not to get too hopeful, but we would be surprised if there wasn’t at least some resulting capacity consolidation and relief for the sector.”

Stifel

Separately, UBS upgraded Tui from “sell” to “neutral” on Thomas Cook’s liquidation. Tui’s short-term profitability and free cash flow should improve, although by 2021 the benefit will be modest, it said, adding: “We expect in the context of low-entry barriers incremental capacity to come to the market over the next 12-24 months. We therefore assume the recovery in profitability will be short-lived before pressure on tour operator margins could re-emerge.”

● Umicore of Belgium led the Stoxx Europe 600 gainers after announcing a strategic partnership with LG Chem and said it would be supplying auto battery materials to the South Korean group for the next “several” years.

No pricing details were given for the take-or-pay contract for 125,000 metric tonnes of nickel-manganese-cobalt cathode materials, mostly supplied from Umicore’s new factory in Poland. There was no change to Umicore’s production target of 175,000 tonnes of cathode capacity by the end of 2021.

Analysts said the amounts were sufficient to power more than 1m electric vehicles, which should increase certainty around Umicore’s expansion. But without knowing the structure of the contracts and the scope of the strategic partnership the deal was proving difficult to value.

“Announcing contracts is the exception and not the norm and we believe this has been announced simply due to the magnitude. We believe the supply agreement is positive on guaranteed tonnage/offtake from its capacity additions. However, as oversupply concerns continue to weigh on global cathode markets, ultimate product pricing terms/potential impact on Umicore’s margins/implied return on capital still represents an overhang to the investment case.”

Credit Suisse

Sellside stories

● Morgan Stanley downgraded Pets at Home from “equal weight” to “underweight” with a 150p-a-share target. Like-for-like sales growth may have improved and short sellers have been closing out positions, but a “runaway” share price has ignored the fundamental challenges faced by the retailer, it said.

“Pets at Home shares have almost doubled since the start of this year. Earnings expectations have increased but only marginally, so this has mostly come from re-rating and the shares are now trading at more than 16 times consensus earnings — a high multiple, we believe, for a retailer that has delivered no earnings growth over the five years since it IPO’d.”

Morgan Stanley

Pets at Home has started to shrink selling space and has only just begun reshaping its vets division, the broker added. It said that retail gross margins of more than 50 per cent were unlikely to be sustained in the long term. However, the broker also advised patience. “Whilst we have a high level of conviction that Pets at Home shares have become overvalued in recent months, we believe that they will likely remain so until like-for-like growth normalises and we have rather less conviction as to when this will happen,” it said.

● Peel Hunt downgraded Weir Group, the pump maker, from “buy” to “hold” with a £15.85 target. Earnings volatility caused by Weir’s Oil & Gas division “detracts from the stock’s core investment proposition”, it said.

“The commentary around US shale has continued to deteriorate in terms of the rig count, spending plans and the debt profile of many US energy companies. In turn, this makes us believe that Weir’s Oil & Gas guidance for the current year might be slightly optimistic, and more significantly, that the run-rate trajectory into 2020 with consensus expecting a 31 per cent uplift in profitability might not be achieved.”

Peel Hunt

Many of Weir’s peer group have sought to separate their oil and gas units, including Atlas-Copco, Metso, TechnipFMC and Dover Corporation, Peel Hunt said. But the broker cautioned that Weir’s exposure to a shale market in decline would make following the same path challenging. “It is clear what has to happen, but how does Weir execute such a plan against the current North American shale market backdrop?”

● Liberum downgraded Royal Mail from “hold” to “sell” with a 185p target price. Its downgrade followed The Communication Workers Union this week balloting 110,000 postal workers about a possible national strike over issues including working hours.

“Royal Mail’s ongoing dispute with its workforce poses significant problems, even if industrial action going into the peak season can be avoided. The dispute signifies a breakdown in co-operation between management and staff, which bodes ill for business-as-usual productivity improvements. In our view, the recent share price strength is completely at odds with the deteriorating industrial relations picture and weakening macro outlook, and the valuation wholly unreflective of the structural challenges faced by the group that could lead to a long-term and irreversible squeeze of profit margins.”

Liberum

● In brief: EssilorLuxottica cut to “hold” at Deutsche Bank; K+S cut to “hold” at Société Générale; Kloeckner raised to “buy” at Jefferies; SSAB cut to “neutral” at Macquarie; Salzgitter cut to “underperform” at Jefferies; Tate & Lyle rated new “neutral” at Merrill Lynch; Voestalpine cut to “hold” at Jefferies.

Read more

Global stocks edge up on trade talks, China stimulus hopes

For market updates and comment follow us on Twitter @FTMarkets