Broker tips: SIG, Dalata, Tesco

Canaccord Genuity has slashed its price target on SIG, arguing that the British building materials group is currently "uninvestable".

FTSE 250-listed SIG – which has issued two profit warnings since October – announced on Tuesday that both its chief executive and chief financial officer had resigned with immediate effect. Replacing Meinie Oldersma as chief executive is Steve Francis, former head of collapsed café chain Patisserie Valerie. He will initially hold the role until the end of 2020.

In a note published in response, Canaccord cut its price target to 76p from 94p, which it said reflected the increased risks now associated with the stock. It retained its 'hold' recommendation.

"Despite significantly refining the business portfolio and returning the balance sheet to a net cash position, after recent profit warnings highlighted weak trading and operational performance, the board has decided a new management team is needed," Canaccord analyst Aynsley Lammin said.

"The sudden departure of both the CEO and CFO will come as a surprise to the market and raise questions about what has happened recently to provoke this. The update confirms that trading remains poor and sales have clearly not yet stabilised, with margins likely under more pressure."

Canaccord said visibility over 2020 profits was "very poor", especially as falling sales will likely put more pressure on profitability and operational efficiencies.

"Given the history of SIG turnaround attempts, and the structural challenges faced by the group, the market will likely remain sceptical and without any detailed guidance on 2020 profits until April, the shares are arguably uninvestable for now"

Analysts at Berenberg lowered their target price on Irish hotel operator Dalata from 700p to 625p on Tuesday, citing some "more modest" levels of free cash as a result of the group's expansion plans.

Berenberg praised Dalata for delivering "a robust set of 2019 results", with revenues rising by roughly 9% and underlying earnings growing by 13%.

The German bank also highlighted that as the company faced "challenging market conditions in every region", its figures provided "a clear demonstration of its resilience".

"This gives us increasing confidence that the business in Dublin will remain very profitable over the coming years and that the UK pipeline, which is set to contribute materially in the medium term, will prove to be highly successful," said Berenberg, which stood by its 'buy' rating on Dalata's shares.

Moreover, Berenberg said Dalata was generating "substantial" normalised free-cash flow, providing balance sheet capacity for expansion opportunities.

"Dalata has achieved significant normalised FCF (pre-development capex) growth in recent years and generated more than €100m for the first time in 2019.

"We expect this will remain at a similar level in future years, providing plenty of capacity to invest in expansion. Due to higher development capex, overall FCF will be more modest in 2020 and 2021 than it was last year, but it will subsequently rise substantially."

While the analysts reduced their price target, they said they continue to believe the stock is" significantly undervalued" at its current level.

Tesco is a cash compounder that values capital discipline overgrowth after selling its Chinese stake and other overseas interests, said Shore Capital on Tuesday.

Reiterating its 'buy' rating on Tesco, Shore said the sale of the retailer's 20% stake in Gain Land to joint venture partner China Resources Holdings for £275m is a further step in Tesco's retreat from global ambitions. Tesco is also in talks to sell its operations in Malaysia and Thailand and would listen to offers for its Polish business, Shore said.

Thailand is Tesco's biggest growth prospect and should be sold for a price that fits that profile, Shore said. Generally Chief Executive Dave Lewis's reversal of foreign expansion to concentrate on the UK and Ireland has been welcome, the broker said. Shore kept its 249p target price on Tesco shares.

"Tesco is now a very much more focused organisation, one with considerably more constrained geographic and growth aspirations than prior regimes," Shore analyst Clive Black wrote. "That strategy has delivered, however, a capital disciplined organisation where we see scope for ongoing robust cash generation, indeed we now see Tesco as a cash compounder."

The strategy can achieve steady earning growth, a dividend paid from free cash flows in line with earnings growth, complementary acquisitions and capital returns to shareholders, Black said. When Ken Murphy replaces Lewis in October he will have less corporate travelling to do than his expansionist predecessors, Black said.

"With the group operating in a mature UK grocery market in particular, we see such a strategy as rational and one that we support," Black said.