Broker tips: Cineworld, Card Factory, Capita

Analysts at Numis and Peel Hunt reacted positively to Cineworld's latest interims.

The former highlighted indications from management that it was reviewing "further integration benefit opportunities" from its recent acquisition of Regal in the US, adding that following a "good" start to the second half for the company, they now saw "upside risk" versus the consensus view as the year progresses.

Numis estimated that every $10.0m in additional synergies would add roughly 2% to the firm's earnings per share.

They also pointed out the scope for the shares to appear even cheaper as consensus estimates "rebase" from Sterling to the US dollar.

However, they kept their target price at 328p.

Over at Peel Hunt on the other hand, the target price for the shares was raised, from 300p to 320p, with the recommendation kept at 'add'.

On the back of the company's "strong" first half performance in the US, the broker raised its full-year forecasts by 6%.

They too picked-up on management's comments regarding existing margin for further opportunities versus their existing target for synergies and pointed out how Cineworld was continuing to roll-out its premium product.

"Our upgrade reflects Regal, representing almost three-quarters of the company, trading materially ahead of our 4.7% forecast growth in box office."

Analysts at Peel Hunt downgraded their recommendation for shares of Card Factory, pointing to the 0.7% drop in company's like-for-like sales over the first half of the year and the lack of any guidance for an improvement from management as the key reasons for the change.

The former meant that, together with higher costs, the broker now expected Card Factory's full-year earnings before interest, taxes, depreciation and amortisation to be lower, a £89.0m.

Indeed, were it not for the strong performance from the company's website - which was only marginally profitable - in the second quarter, then the total sales would have been even weaker, Peel Hunt said.

As well, the analysts said, "clearly management does not see much of a pick-up from the slightly negative picture in H2.

"[...] There is no sign of the negative forecast momentum relenting, and we see little reason to hold the shares even if the special dividend is confirmed as set to be paid in H2."

Peel Hunt lowered its recommendation from 'hold' to 'reduce', setting a target price of 180.0p.

Shares in outsourcer Capita rallied on Thursday as Jefferies upgraded the stock to 'buy' from 'hold', highlighting the potential of the company's software division.

Jefferies, which cut its price target to 180p from 200p, said it remains cautious on the outlook for UK outsourcing as attrition is expected to remain elevated. It said the company's interim results "removed investor euphoria" as free cash flow was weak and management's revenue growth narrative softened.

However, Jefferies argued that Capita's software business could be its differentiator, as it has a brighter revenue outlook, attractive free cash flow characteristics and recently won a contract in India.

In addition, it said Capita's FY20 margin guidance may be conservative.

"If we add in cost savings (Capita’s targets are slightly more ambitious than peers as a percentage of revenue) and assume loss-making contracts are restored to break-even (a circa £30m profit tailwind) then the FY20E EBITA margin could move back toward the 11% figure reported in FY17.

"This is ahead of management’s 10%+ target and our 10.5% forecast but consistent with the CEO’s comment in April 2018 that a leaner business should generate a margin similar to the past."

In its interim results earlier this month, Capita posted a 59% drop in pre-tax profit but the company's CEO insisted he was making "good progress" on turnaround plans.