Broker tips: Pendragon, Countrywide, Spire Healthcare, Inmarsat, Smith and Nephew
JPMorgan Cazenove upgraded car dealership Pendragon to 'neutral' from 'underweight' on Wednesday following its first-half results a day earlier, lifting the price target to 23p from 19p, citing the relative improvement in trading in the second quarter and stabilising industry outlook.
In particular, JPM reckons a near-flat outlook for second-half new car sales should help both new and used margins, with profit before tax operationally geared to this improvement.
It upgraded its pre-tax profit forecast by 7.6% for FY18 to £54.9m, mainly due to UK motor, but said it remains 10-15% below consensus.
Pendragon posted a 41% drop in first-half pre-tax profit on Tuesday to £28.4m versus full-year consensus of around £62m, while continuing pre-tax profit fell 46%, mainly on the back of weaker UK Motor trading and £2.4m higher interest costs. JPM said the improving UK new car trend is of note, with first-half like-for-like gross profit down 6% versus a 17.6% drop in the first quarter.
"The outlook appears to be beginning to improve, due in part to the weakening comparatives - £48.5m of profit before tax in H1 2017 versus £11.9m in H2. While significant risk remains, we expect the worst of the market conditions have passed, such that Pendragon's valuation may begin to look increasingly favourable."
Analysts at Credit Suisse upgraded Countrywide to 'neutral' on Wednesday, but slashed its target price on the London-listed firm from 77p all the way down to 17.2p.
Credit Suisse refrained from "turning more optimistic" on the UK's largest estate agency group after its decision to offer an 80% discount to its share price in its highly anticipated equity raise.
Countrywide proposed a placing and open offer to raise £140m last week and, while the quantum of the placing was "broadly in-line with market expectations" of £100-150m, the size of the discount required to raise the funds was not.
While CS said Countrywide's current share price "looks depressed", the broker still saw some headwinds ahead of the group and, in the eyes of its analysts, the risk/reward trade-off had not yet swung to the upside.
Should the group's drastic capital refinancing plan not be approved by shareholders at the group's AGM on 28 August, Countrywide will be forced to repay or renegotiate its £275m amended credit facility and, in the event that neither of these could be achieved, CS warned that it was a very real possibility that the company could go into insolvency.
"Without greater clarity beyond 28 August, we move our forecasts in-line with management guidance," said CS.
Spire Healthcare was under the cosh on Wednesday as Berenberg cut its stance on the company to 'sell' from 'buy' and slashed the price target to 120p from 290p following the profit warning on Monday.
Berenberg said the warning means it now has even less certainty of a near-term improvement in Spire's fortunes since the visibility of NHS market factors that are affecting the company’s growth has declined over the last six months and cost growth has been more rapid than expected.
"Given that guidance was reiterated 10 weeks ago, operations have clearly taken a marked turn for the worse, and the lack of new guidance indicates that management is currently unable to forecast its own business.
"Only when this is possible, and when we regain confidence that the five-year history of earnings downgrades is over, can we look further ahead to its 2022 targets, which themselves imply that Spire will have greater control over the market than we believe is possible."
The bank cut its 2018 EBITDA estimate by 16% and its earnings per share forecast by 37%.
It noted the potential for intangible asset write-downs and a dividend cut and said speculation regarding the potential for Mediclinic to acquire the company helps to limit the downside, but Mediclinic’s five-year low share price, and the negative reaction to its previous bid for Spire, adds risk to relying on that "get-out-of-jail-free card".
Morgan Stanley has upped its target price for Inmarsat and, while the recent rally in the shares makes the valuation "not particularly appealing", there are variables in the pipeline that could make the shares look cheap.
The satellite operator, whose shares have rallied from lows of around 350p in April to almost 540p on Tuesday's close, above the 532p level at which US rival Echostar declared an interest in a takeover.
"This has brought the company more time and has shifted focus away from the lack of meaningful cash generation until 2021e and our estimate that net debt to EBITDA will peak at 3.5x in 2019," Morgan Stanley said, seeing a "very gradual" improvement in the core maritime, government and aviation businesses meanwhile.
Morgan Stanley kept its 'equal-weight' rating but raised its share price target raised to 560p on the back of management's guidance for lower capex expectations from 2021, updated GBP-USD assumptions of $1.30 from $1.35 as the company benefits from sterling weakness.
Analysts see the shares supported by the 532p Echostar price, which Inmarsat said "very significantly undervalues" the company.
A survey of surgeons by UBS has indicated that Smith & Nephew's share of the orthopaedic surgical robots market will not be as big as first thought, leading to analysts downgrading their rating on the shares.
UBS, which cut its rating to 'neutral' from 'buy' and its target price to 1,340p from 1,470p, said its underlying market view remained that adoption of surgical robots will be "widespread in orthopaedics".
"However we now believe our initial assumption of S&N's share of the market was too positive," analysts said, having revised their survey of surgeons and found respondents were "less aware of, and less likely to purchase" S&N's Navio than expected.
Only 4% of surgeons cited robotics as a driver for S&N share gains.
"Given the upcoming launch from competitor Zimmer Biomet and no visible acceleration in S&N knee growth one year after launch, we downgrade to Neutral. Upside opportunity remains clear, base case growth assumptions moderated.
While UBS is less positive than previously, analysts still see potential in the product and believe Navio should help drive knee growth of around 150bps above the market to 2022 and see a potential upside scenario in where the product delivers high single-digit growth in knee implants, driving at least 4% of group sales growth and around 200bps of margin expansion, though there is also a risk that the hip and knee market slowdown from 3-4% before 2016 to 0-2% in 2018 "is structural".