Broker tips: Tesco, Kingfisher, TalkTalk

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Broker tips: Tesco, Kingfisher, TalkTalk

Wed, 12 July 2017
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(ShareCast News) - HSBC sounded an optimistic note following the competition regulator's announcement that it had referred Tesco's acquisition of Booker for a Phase 2 review.
For starters, the companies themselves had asked for an accelerated move to Phase 2 by the Competition and Markets Authority, the broker argued.

More significantly, only 350 local areas were under scrutiny by the CMA, instead of the between 400 to 635 which had been bandied about in media reports.

In those areas there were 'symbol' stores, meaning establishments that might suffer from reduced competition or anti-competitive practices.

On top of that, the reasoning provided by the CMA was that Booker could reduce services offered to the symbol stores it was then currently supplying in order to send customers flocking to their nearest Tesco.

Kingfisher's attempt to implement joint-buying across the group will fail again (for a third time in fact) but at their current price the shares were implicitly assigning almost zero value to almost all its units, leading Morgan Stanley to double-upgrade the stock from 'underweight' to 'overweight'.

They also bumped up their target price from 290.0p to 380.0p.

As an example, analysts Geoff Ruddell and Amy Curry posited a scenario where the company's Screwfix business was valued at 15 times earnings.

That, they went on to say, would mean its other key operating companies were "almost worthless" using a sum-of-the parts valuation.

Simply for the whole group to be worth less than 400.0p a share the rest of those operating companies would need to be valued at single-digit price-to-earnings multiples.

Yet the company had £3.4bn of freehold property on its books, £0.6bn in cash and its pensions scheme was sporting a surplus.

So eventually, they went on to say, investors would stop focusing on the negative news-flow and forecasts for the company and begin to ponder what the proverbial 'Plan B' was, despite management's assertion that it did not have one.

Analysts at Credit Suisse slashed their target price for Talk Talk's shares after the company's latest full-year numbers and the change in strategy from the company's new management.

In a research note sent to clients, analyst Paul Sidney said those two factors drove him to cut his estimates for the company's earnings before interest, taxes, depreciation and amortisation over 2018 to 2021 by roughly 20%.

Hence the reduction in his target price from 260p to 210p, although he kept his recommendation on the shares at 'outperform'.

Talk Talk was now targeting an expansion of its core broadband base and a return to revenue growth, shifting away from projects requiring a lot of capital, such as its "inside-out mobile network" strategy, Sidney said.

While that new focus might boost its top-line, the impact was offset by lower expectations for Corporate sales.