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Broker spotlight - BHP Billiton, Vedanta, Rio Tinto, Pearson, Virgin Money

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Citi got the red pen out and scrapped its 'buy' rating on iron ore heavy major BHP Billiton (LON:BLT) this morning in a bearish note on the miners.

The research entitled ‘End of the Iron Age’, predicts iron ore prices to now average US$45/t in 2015 and sinking further to US$40/t in 2016.

As a result, analysts at the US bank moved their sector stance down to 'neutral' from 'bullish.

"We think the self-help, cost cutting and improving capital structure catalysts have played out and the sector is increasingly more vulnerable to lower commodity prices and macro conditions, in particular a strengthening US$, slowing Chinese economy and Citi’s view of continued oversupply in the bulk commodities."

It sees a  tough one- two years ahead for the sector.

On BHP, Citi is now 'neutral' and has a target price of £15.50 per share, down from its previous £18.

“The reduction in our target price and the change to our recommendation are largely driven by the iron ore price downgrade,” it said, adding that other commodity prices have also been lowered, including coking coal.

Citi has also moved to 'neutral' on  BHP, Glencore and Rio Tinto, and downgraded to 'sell' recommendation on Anglo American and Vedanta. 

"We also downgrade Gem Diamonds and Lonmin to Neutral," it told the note to clients.

Elsewhere, Jefferies took a look at publishers Pearson and Reed Elsevier (LON:REL) but takes a considerably different view of both. 

On the latter, the broker upped its target price to 1060p per share from 884p, keeping its 'hold' rating.

Analyst David Reynolds said Reed appeared to "have constructed something of a 'dull but reliable' reputation in recent years, something of a turnaround for the REL of the noughties... And while we remain holders, in many ways REL seems to be navigating the digital challenge more ably than PSON."

Pearson (LON:PSON), meanwhile, the owner of the Financial Times, was cut to 'underperform' from 'buy' and had its share price cut by 50p to 1184p. 

It says the share price has risen to a "lofty multiple" and the broker believes that the major restructuring may prove to be simpler than the firm delivering in what is now a "digital world".

"We see real digital advances beginning to emerge as tablet, iTunes U and Google Apps for Education deliver real utility. Top educators now seek to publish 'text books' for free; execution risks are rising," it said.

Meanwhile there’s much to like about Virgin Money (LON:VM) , according to analysts at German bank Berenberg who have initiated a 'hold' rating on the challenger bank with a 400p price target. The currrent price is 418.30p.

It reckons the stock should prove a "relative winner" in the sector, on which the broker generally is negative.

“While UK mortgage growth remains subdued, intermediaries are gaining market share, a result of regulation that incentivises third-party distribution. 

“An established intermediary offering means Virgin Money is well placed to take advantage of this structural trend.”

In small caps, Richland Resources (LON:RLD) has started pre-production work at its Capricorn sapphire project in Queensland.

Samples run through a pilot plant have recovered sapphires and work is underway to finalise the pit design, layout and mining plan.

Charlie Long, analyst at broker Sanlam, said the Capricorn mine was potentially the largest sapphire mine in the world. 

“Previous owners did not brand the mine’s product, so Richland will be the first company to promote Australian sapphires in a significant way,” he said.

“Given the potential volumes of the mine, Richland is entering a transformational period.”


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