Broker tips: Direct Line, Sage, N Brown, Quiz, Joules
Deutsche Bank upgraded Direct Line to 'buy' from 'hold' on Tuesday and lifted the price target to 390p from 380p as it pointed to an attractive valuation, an expected inflexion in motor pricing, medium-term optionality and receding risks.
As far as the valuation is concerned, DB said there is no doubt Direct Line provides an attractive dividend yield for the next few years. It's around 8.8% a year on average over the next three years, with long-term growth prospects of 2-3% leading to an 11% total shareholder return.
In addition, the bank said lower motor insurance prices since September 2017 are now adequately reflected in both consensus expectations and the current share price.
Deutsche also said that following the company's analyst day in Bristol last week, it is clear there is "significant" potential to improve productivity from the new IT platform.
It noted that Direct Line is rolling out an alternative pricing model, increasing its quote footprint and integrating Guidewire and Radarlive in its pricing, which in turn should allow it to gain share in the PWC channel over time.
"Though it could be at least 18-24 months before we start to see a tangible benefit of these investments coming through the P&L, these initiatives could nevertheless provide additional upside if delivered successfully on top of an already very attractive valuation," DB said.
DB added that having spoken to the company, it remains comfortable that a recent surge in subsidence claims seen elsewhere in the industry should be manageable for Direct Line.
Barclays downgraded Sage to 'underweight' from 'equalweight' on Tuesday and cut the price target to 495p from 675p, citing increasing uncertainty, as it took a look at the broader European software and IT services sector.
The bank said that while Sage's valuation remains undemanding on current estimates, the lack of a chief executive at such a crucial stage in the company's attempted transition leaves "considerable" downside risk.
"We see a lack of marginal buyers of the stock until such time that a new CEO is in place and his or her strategy revealed. Stephen Kelly took the view that the prior strategy was sound, but that the pace of execution needed to be stepped up. Management attrition under him has been very high and it is now clear that an alternative approach is required.
"We think this could likely involve a margin reset to invest organically in an acceleration of a cloud architecture transition (and/or further expensive M&A), and we nudge down our FY20 margin to 24%, leaving us over 10% below consensus earnings per share in this year."
Sage is due to report its FY18 results next month. Barclays said it expects organic revenue growth for the year of 6.7%, slightly below guidance and equating to organic growth for the second half of 7%. The bank expects operating profit for the second half of £291.6m, equating to a margin of 30.2%, in line with guidance.
Berenberg started coverage of N Brown, Quiz and Joules on Tuesday as it took a look at the broader retail sector, noting that the gap in performance between online and store-based retail in the past three years has been huge.
The bank initiated coverage of specialist fashion retailer N Brown at 'hold' with a 130p price target, arguing that its competitive advantage is being eroded.
It said that as the only plus size specialist of scale, N Brown held a significant competitive advantage over peers for many years. However, the online retailers that have recently entered the market are providing greater competition, putting pressure on sales.
Berenberg said the company's loan book has proven to be highly profitable so far, although its outlook is uncertain.
The bank also started fast fashion retailer Quiz at 'hold' with an 80p price target, saying that it likes the model but has some concerns. It pointed to the company's profit warning last Friday, which it said highlights a number of issues, namely the lack of differentiation amid intense competition in the fast fashion market, which is holding back growth.
"In addition, the company's large exposure to troubled retailer Debenhams gives us cause for concern. A valuation of 18.3x FY 2019E price-to-earnings seems to be fairly pricing in these risks, so we initiate coverage with a hold."
British premium lifestyle brand Joules fared better as Berenberg started coverage of the stock at 'buy' with a 360p price target, saying it is it is well placed to emerge as a long-term winner in the challenging UK retail market.
"Investments in its e-commerce offering, coupled with a very flexible store estate, have enabled it to adapt to sales shifting online. Equally, we believe its wholesale and licensing businesses could provide material benefits," Berenberg said.