Broker tips: Sage Group, Whitbread, ASOS, Vedanta Resources
Citi still sees potential in Sage Group despite the surprise profit warning last week, with the bank's conviction unchanged on its belief in the demand for the accounting software firm's products.
On Friday, Sage saw its shares drop more in one day than they had done for 24 years after warning on first-half profits ahead of schedule, complete with inconsistent levels of operational execution and a lowered full-year guidance on revenue.
"Post the 2018 capital markets day, we said execution was key, and this update is disappointing in our view," Citi's analysts said.
However, Citi noted that in terms of its thesis on Sage, its conviction level around two of its three core premises, demand and cost rationalisation, was unchanged. However, a "tempered optimism" now exists around its revenue profile, the third of its core premises, which triggered cuts to its estimates.
Analysts reduced overall organic revenue growth forecast for 2018, '19 and '20 financial years by one percentage point each year. "We also trim operating margin estimates to reflect the lower top line," the analysts concluded.
Citi maintained its 'buy' rating on Sage, but cut its target price to 750p from 780p as a result of its unchanged discounted cash flow approach, revised estimates and higher weighted average cost of capital.
With 10% of Whitbread shares now in activist investor hands following the emergence of Elliott Advisers, analysts from Credit Suisse said when offering one of many varying opinions expressed by brokers on Monday over just how much value can come from the breaking-up of the Costa Coffee and Premier Inns owner.
Elliott has confirmed that is has amassed a near-6% stake which together with Sachem Head, which revealed its 3%-plus sake in December, means roughly 10% of the shares are held by activists.
Sachem has reportedly been pushing for the separation of the property from the hotel assets, a re-leveraging of the balance sheet, and the separation or sale of Costa, while Elliott is said to just be pursuing a spin-off of Costa rather than "any other financial engineering".
Credit Suisse said it saw a 26% potential upside to 4,950p as the addition of Elliott as the group's largest shareholder "will increase the likelihood of break-up".
The Swiss bank believes there is "much wider shareholder support for change" and that a split of Premier Inn and Costa "makes sense", with the current price "inconsistent" with the long-term competitive advantages of each business and a sum-of-the-parts valuation that implies 40% potential upside.
January's update showed that current trading isn't easy, while the combined corporate agenda is "very full", with Costa facing structural challenges from its high street focus and both businesses striving for material UK space growth, with international aspirations, cost inflation pressures and management's saving plan alongside Costa's wide range of operational initiatives to improve positioning.
If management wants to fight the break-up, Credit Suisse said "other levers could be pulled", noting Whitbread's £5.4bn of freehold property, the potential for restructuring the low-return pub restaurant business and for extending the efficiency mindset and the £150m cost-saving target.
In a separate note, Credit Suisse cut its stance on ASOS to 'underperform' from 'neutral' on Monday and slashed the price target to 6,075p from 7,050p, saying the first-half results exposed some of the challenges of its growth model as customer growth moderated and the tailwind from FX this past year and a half largely ran its course.
"The near-term debate on the stock will largely focus on cash flows which look poor in the medium-term, cost leverage, and earnings quality, all of which we do not expect to change until at least the prelims in October," CS said.
The bank said it was leaving its below-consensus sales growth forecast of 27% for FY2018 largely unchanged, but with a slightly higher UK contribution, it cuts its pre-tax profit forecast by around 1-2% over the forecast period.
"While valuation gap to peers has narrowed following shares circa -10% since interims and -17% from March all-time highs, we think risks are clearly to the downside and expect shares to underperform peers."
ASOS shares slumped last week as its interim profit missed expectations and the company announced an increase in its CAPEX to facilitate additional distribution and logistics facilities.
In the six months to 28 February, pre-tax profit rose to £29.9m from £27.3m in the same period a year ago, as revenue pushed up 25% to £1.16bn. Analysts had been expecting a pre-tax profit of £30.8m.
Analysts at Goldman Sachs downgraded Vedanta Resources on Monday, citing concerns regarding the mining firm’s leverage and operational issues.
Specifically, the company, which appointed a new CEO on Monday, is currently wrestling with inflationary pressures threatening its aluminium division and protests surrounding its Tamil Nadu smelter in Kumarettiyapuram, a village 600km off Chennai, India.
Villagers protesting at the smelter claim it is a health hazard and are demanding the company cease all planned expansions around the $11.5bn copper smelting plant.
Vedanta has claimed that the protests stem from “false allegations” and that expansions are continuing on schedule, despite reports that the state pollution regulator rejected the company’s application to renew operations.
As well as the downgrade in rating to ‘neutral’ from ‘buy’, Goldman analysts also hacked away at their target price to 800p from 950p.
With regard to other concerns, the analysts said: “We see inflationary pressures increasing at the aluminium division. Alumina prices have increased significantly and they have more than offset the increase in aluminium prices in our view. This will in our view have an impact on the margins and cash generation.”