Broker tips: Computacenter, Ascential, Rentokil
Barclays cut Computacenter to 'underweight' from 'equal weight' on Tuesday on valuation grounds.
The bank noted that following a relatively slow start to the year, the shares rose 26% in the second quarter versus the Eurostoxx up 2.4%, giving a year-to-date increase of 25.4%. The performance was driven partly by better-than-expected first-quarter results, although Barclays argued that the revenue performance was largely driven by lower margin supply chain revenue.
"Following the strong share performance last and this year, the stock now trades at over 18x our cash adjusted FY19E price-to-earnings, a price we deem too expensive for a stock with this growth profile."
Although it cut the stock on valuation, it lifted the price target a touch to 1,100p from 1,080 on the back of earnings per share upgrades.
Commenting on the company's first-quarter update, Barclays said the outlook read positively and talked to a better-than-expected performance and another year of anticipated growth.
Barclays said that if the company can quickly recover losses in France and improve the margin in Germany towards that of the UK, earnings would move upwards. "Longer-term, a convincing strategy around gross margin expansion could be a positive for the valuation multiple," it added.
Barclays expects the first-half results in August to show 3% growth in services revenue and 17% growth in the supply chain, leading to overall revenue growth of 13%.
Peel Hunt upgraded Ascential - the owner of the Cannes Lions festival - to 'add' from 'hold' and lifted the price target to 515p from 400p as it updated its forecasts for the sale of the events business, moves in the dollar and the acquisition of global digital subscription business WARC.
The brokerage said that while the events business sale is initially dilutive, the price is "excellent" for Ascential and well ahead of its previous expectations. "Moreover both the sale and the cash will accelerate the strategic opportunity for the group," it added.
Peel also noted that its previous forecasts used a dollar exchange rate of $1.40 to the pound, consistent with the spot rate at the time of the prelims. Since then, however, sterling has fallen sharply.
"Ascential, as a rule of thumb, is euro-biased in H1 (driven by Cannes Lions), but dollar-biased in H2 (Money 20/20 USA). As we head into the interims we adjust existing forecasts for the current rate," it said.
The brokerage moved its dollar forecast for the current and future years to $1.32, which adds 2% to revenue this year and the next.
Analysts at Jefferies chose to downgrade their stance on pest control firm Rentokil on Tuesday, saying that the group's accelerated growth had brought it to full valuation and moved the stock from 'buy' to 'hold'.
Jefferies commended the accomplishments of Rentokil's management and said it maintained a "positive view on the company", but believe the stock's recent rally had resulted in a full valuation.
However, Jefferies, which chose to increase its price target on Rentokil ahead of its July interims in order to account for an uptick in growth and underestimated operating leverage, saw "insufficient upside" to maintain its 'buy' rating, and subsequently, downgraded the group from 'buy' to 'hold'.
While year-over-year growth rates are likely to fall, Jefferies expects sequential acceleration in the organic growth of Rentokil's pest control unit and feels that consensus earnings per share estimates had underestimated the improvements to the firm's operating leverage.
"We forecast 17% FCF growth in 2018, primarily driven by the Haniel Joint Venture’s inaugural dividend. When combined with organic growth, we believe this provides comfort to Rentokil’s ability to achieve its medium-term guidance targets," added Jefferies.
The broker also added that in its first-quarter report, Rentokil flagged a £10m-15m currency headwind to its adjusted pre-tax profit. Given the rally of the USD versus GBP, Jefferies now believes that £5-£10m was "more reasonable".
Jefferies upped its price target on Rentokil to 340p from its previous 380p mark.