Morgan Stanley downgrades SSP, Paddy Power, but likes Ladbrokes, Whitbread
In a look at the leisure sector, Morgan Stanley was positive on Ladbrokes, Whitbread and Merlin Entertainment with 'overweight' recommendations all round, but downgraded SSP Group and Paddy Power Betfair.
Flutter Entertainment (DI)
14,865.00p
17:15 24/04/24
Food & Drug Retailers
3,798.88
17:09 24/04/24
FTSE 100
8,040.38
16:34 24/04/24
FTSE 250
19,719.37
17:09 24/04/24
FTSE 350
4,419.71
17:09 24/04/24
FTSE All-Share
4,374.06
16:44 24/04/24
Ladbrokes Coral Group
173.50p
16:04 28/03/18
Merlin Entertainments
454.60p
16:54 01/11/19
SSP Group
204.40p
16:45 24/04/24
Travel & Leisure
7,630.10
17:09 24/04/24
Whitbread
3,112.00p
16:39 24/04/24
Merlin, which was given a 580p price target, is felt to be close to confirming a new Legoland Park for New York that it is estimated could add 8% to earnings per share when open by 2020.
"We think management also will confirm in October it is on track for its 2020 themed accommodation and Midway expansion targets."
With Whitbread's discount to peers growing, Morgan Stanley affixed a 4,700p price target, as it thinks the Premier Inns and Costa Coffee owner will report "robust" interim results in October given solid UK hotel trading over this period.
Making a call on coffee shops "is tougher given the unusual summer weather, and the company has said it is not expecting its initiatives to deliver until later in the year," analysts wrote, forecasting like for like sales will be modestly positive, and H1 margins will surprise positively.
On Ladbrokes Coral, although the market is already discounting a severe regulatory outcome from the government's triennial review, MS thinks the announcement some time in October or onwards "will be a positive catalyst for Ladbrokes Coral".
Although analysts expect a negative scenario with £10-20 max fixed-odds betting terminal stakes as the most likely outcome, the company's current valuation of an implied price for the UK retail business of 1-2 times EBITDA "leaves asymmetric upside risk".
Restaurant concession operator SSP is downgraded to 'underweight' due to weakening UK rail demand, which represents around three quarters of UK revenue, and slowing UK outbound air travel as airlines moderate capacity this winter.
With higher a capex spend relative to EBITDA than other similar sectors, less of its EBITDA drops through to EBIT and free cash slow, which makes SSP look "very expensive".
While Paddy Power Betfair has "many attractions", including its market leading positions, strong technology offering, robust balance sheet and excellent free cash flow generation, a previous rating was "too optimistic" on potential market share gains, while management and regulatory change further increases uncertainty.
With the prospect of a point of consumption tax in Australia, hitting 2018 EPS forecast by 15% leads to a price target cut to 7,500p and a downgrade to 'equal-weight'.