Broker tips: BT, Auto Trader, Pets at Home, Capita
UBS is positive on BT Group as the telecoms group puts the phone down on boss Gavin Patterson, thinking the news "could be positive for investor sentiment" but doubting whether the board can, as they suggest, make no change to strategy.
After the BT board expressed in its Friday statement that it remains supportive of the recently outlined strategy, suggesting no significant strategic changes, several analysts were perturbed.
"However," UBS wrote, "we think issues that an incoming CEO will have to address are: the pace of FTTH rollout at Openreach; the strategy around BT Sport; the future of Global Services; execution of the Transformation programme and how much of the £1.5bn pa of cost savings should be re-invested back into the business."
With BT having pulled down expectations post weak fourth-quarter results and unveiling a new staff and office restructuring, UBS thinks the guidance is "conservative" and "leaves some headroom for Openreach to accelerate its fibre (FTTH) rollout".
On a sum-of-the-parts and discounted cash flow valuation the shares look "relatively cheap", offering a 9.0% calendarised equity free-cash-flow yield and 7.6% dividend yield. UBS kept its 'neutral' rating and 210p price target, for now, also reiterating the view that the pension deficit at BT will narrow over time and that there should be growing visibility over economics for fibre capex. "That said, it will likely take several quarters to restore investor confidence after the recent reset to estimates."
Risks appear better understood and expectations for Auto Trader are more reasonable, Berenberg said on Friday as it upped the stock to 'hold' from 'sell' and lifted the price target to 365p from 350p.
The bank said it has been cautious on the company's medium-term growth and profitability levels for some time. While many of its concerns remain, mostly with regards to the outlook for the used car market and the impact of competition, both consensus expectations and valuation multiples have reduced over recent months.
"Where we have been positively surprised, however, is in Auto Trader’s ability to drive new product penetration (such as dealer finance), which could help to offset any near-term headwinds."
Berenberg said Auto Trader’s full-year 2018 results highlighted two positives that could support growth in the near term: 1) that the April price increases “went well” and 2) that over 69% of retailers eligible for monetised dealer finance are now paying around £100 a month to advertise their own finance rates.
"Auto Trader is now trading on an EV/EBIT of 16.1x and a price-to-earnings of 19.5x, a material discount to both Rightmove and Just Eat. We believe this valuation now fairly reflects both the double-digit earnings growth but also the associated risks highlighted in our previous research."
Morgan Stanley upgraded Pets at Home to 'equal-weight' from 'underweight' on Friday following significant recent share price underperformance, but Berenberg cut the stock to 'buy' from 'hold'
MS, which kept its price target on the stock at 125p, said that while it remains cautious about the company’s longer-term financial prospects, the issues are now fairly reflected in the share price.
The broker has had an 'underweight' rating on the stock since it initiated coverage shortly after the IPO in 2014, amid doubts about the sustainability of gross margins on the retail side of Pets’ business, while more recently it highlighted that many of its vet joint ventures are struggling to reach profitability.
"Despite significant recent price investment, Pets at Home's Retail business still has a gross margin of more than 50%. We think this will prove difficult to maintain, given rising competition from discounters, supermarkets and online specialists."
The bank said its concerns on these issues remain, but they are now priced in as the shares have almost halved since the beginning of last year and are now down around 60% from their 2015 peak.
"Whilst earnings forecasts have fallen, the shares have de-rated significantly and now trade on a single-digit price-to-earnings multiple on consensus forecasts," Morgan Stanley said.
"We think gradual further earnings downgrades are likely in the medium term, but we do not envisage a big profit warning anytime soon. Nor do we see the shares de-rating much further."
Berenberg however, went the other way on Pets, downgrading it and slashing the price target to 140p from 230p.
Capita was on the front foot on Friday as RBC Capital Markets upped the stock to ‘outperform’ from ‘sector perform’ and lifted the price target on the outsourcer to 200p from 185p.
"On balance, with financial leverage concerns now addressed, a credible turnaround plan introduced and the risk of negative news flow low, the shares should outperform in the near term," it said.
RBC said that while this won't be a straight line recovery, if it can prove it has a core offering and deliver sustainable growth, then 9.6x estimate 2020 price-to-earnings looks a compelling starting point for a re-rating.
"However, there looks to be some easy wins on the cost base and we would note that there is no payback attached to the £500m of investment going into the group over the next three years - which should at least provide an underpin to forecasts.
"Near-term news flow is likely to be positive and alongside a valuation which is not prohibitive, we believe this could be the time to take a view on the new strategy."
On the downside, RBC noted that organic growth has been negative of late and said it still reckons the economic and political environment in the UK means growth will become a stretch.