Broker tips: Rolls-Royce, DMGT, WPP

There are three new reasons for investors to cut their holdings in Rolls-Royce, JP Morgan said as it reduced its price target on the engine maker.

The FTSE 100 company's first-half results were broadly as expected but the outlook statement was more cautious than before, JP Morgan analysts David Perry and Sean Stewart said. They cut their price target to 80p a share from 90p with an unchanged 'underweight' rating.

The analysts said Rolls-Royce's free cash flow was under renewed pressure, leading them to cut their estimate for 2021 free cash flow by €300.0m to €1.0bn.

In its results statement Rolls-Royce said that in a "severe but plausible downside scenario" its ability to continue as a going concern could be threatened, the analysts pointed out.

Insiders are also leaving the group. Chief Financial Officer Stephen Daismith announced he was joining Ocado on results day and activist investor ValueAct, which had a board seat, is reported to have sold all its stake.

Civil aero stocks can be lucrative investments after a major sell-off (e.g. 2003, 2009) so we consider Mr Daintith’s departure a bearish signal," the analysts wrote in a note to clients. "Similarly, in March 2019, when ValueAct began selling down its stake in RR, we cited this as a red flag."

Analysts at Berenberg lowered their target price on publisher Daily Mail & General Trust from 850.0p to 770.0p on Friday, stating the group was "struggling to get down to business".

While Berenberg stated that having a portfolio of assets had "many advantages", most notably with regards to damage limitation in a downturn, it added that it was often the case that for every positive story there is a negative one, particularly at times like these.

The German bank remains of the view that DMGT's market-leading brands would enable it to outperform its segments and stated it was also "more positive" on the shape of the recovery for some of the group's more cyclical businesses, such as its events division, which to date had been the key factor in Covid-19-related downgrades.

However, Berenberg said while DMGT's subscription businesses had proved to be extremely resilient so far, it believes a pause in new business over recent months and a slower return to normal levels going forward will result in reduced top-line growth over the next 12-24 months.

This, in addition to a much weaker USD/GBP exchange rate, led the analysts to make significant earnings per share downgrades and lower its target price in the process.

Analysts at Barclays reiterated their 'overweight' recommendation for shares of WPP, arguing that the company's guidance for sales growth and operating margins were too "conservative".

"While WPP shares have rallied from their lows, we would argue they remain good value at 9x 2021 [estimated price-to-earnings]. We reiterate our Overweight rating with an increased 800.0p target," said Barclays, which also lifted its target price on the stock form 760.0p previously.

They also sounded a positive note ahead of the advertising giant's Capital Markets Day towards the end of the year.

As regards the company's "first attempt" at full-year guidance for 2020 on sales and margins at the earnings before interest, taxes, depreciation and amortisation level, they conceded that "Management is rightly pointing out that we still don't know the true economic impact of Covid-19 and we still don't know whether we will see a second wave in the winter."

Nevertheless, markets were not yet pricing in a second wave, so in their opinion, WPP management, led by chief executive Mark Read, was being "unduly conservative".

On the Capital Markets Day, they were "hopeful" that it could be a positive catalyst, although they asked for more colour on the breakdown of its sales, the level of sustainable margins, and on WPP's plans for M&A, dividends and share buybacks.