Broker tips: Euromoney, Centrica, Merlin Entertainments

Canaccord Genuity on Monday cut its rating on Euromoney Institutional Investor to ‘hold’ from ‘buy’ but raised its target price to 1,165p from 1,128p.

Euromoney reported a “broadly reassuring” trading update last week confirming that full year earnings will be more or less in line with expectations, Canaccord said. Reported revenues are forecast to drop 1%, modestly ahead of estimates, while normalised pre-tax profits are predicted to be reach at least £100m, compared to Canaccord’s £100.9m forecast.

“Euromoney has been buffeted by conflicting forces," Canaccord said. "As a significant US$ earner, it has enjoyed a favourable shift in foreign exchange rates (fourth quarter revenues were down 5% underlying, but up 2% reported, showing a 7% benefit from the stronger dollar).”

The broker added: “Euromoney is in the throws of strategic change, as it endeavours to engineer a shift away from more cyclical low quality activities (training, small conferences, print titles) towards higher visibility and preferably structural growth activities (digital data products etc).”

Euromoney has already shut down more than 10% of its Events activities by revenue, and sold some advertising-orientated Energy publishing businesses. However, it has struggled to sell off its lower quality assets.

Canaccord believes high quality digital information businesses will be “hard to find at valuations that Euromoney will be prepared to stomach”.

“We see further bolt-on deals, but see little likelihood of anything transformational, in the short term.”

Centrica’s shares fell on Monday as RBC Capital Markets downgraded the stock to ‘sector perform’ from ‘outperform’ and cut the target price to 240p from 250p.

“With a growth strategy lacking in proof points, a domestic energy pricing position that remains uncompetitive and commodity prices about 5-10% off summer highs, we are becoming less optimistic on Centrica,” RBC said.

RBC said it is concerned that the long-term growth plan for Centrica’s new segments still appears to be in its infancy as the group tries to figure out the best offerings to customers combining the Connected Home, Home Services and Energy services.

The broker believes Centrica should have taken the initiative to launch new product offerings across its services since Ofgem is no longer enforcing the four tariff rule.

“Centrica is facing a sixth year in a row of customer losses in 2016, and while a more stable/gently rising commodity environment may help reduce the cost advantage of the less hedged independent suppliers the competitive environment remains difficult,” RBC said.

“In every month this year other than June, the cheapest British Gas tariff has been at least 30% more expensive than the lowest on the market. With Centrica suffering domestic account losses of 3% in the first half of 2016, the outlook for the remainder of the year remains tough.”

HSBC initiated Merlin Entertainments at ‘buy’ and a target price of 530p on Monday, saying the theme park owner remains “high growth, well-diversified and scalable”.

The bank said following a weak summer it believes there is potential for strong recovery in Merlin's Midway attractions - including Legoland and Madame Tussauds - and the group's Resort Theme Parks - which include Alton Towers and Thorpe Park - in 2017.

A strong pound and worries over terrorist activity in Europe have hurt Merlin’s Midway business in London, HSBC noted.

HSBC estimates 30% of Merlin’s Midway business is in London where it calculates like-for-like sales have been down about 7% compared to a 5% increase in the rest of Europe.

However, HSBC believes the London business will turnaround in 2017 as a weaker post-Brexit pound attracts more tourists.

“London trends should benefit from a weak currency in 2017 and so far we have seen an increase in inbound UK numbers and expenditure but the data suggest these figures relate to friends and family visits.

“We expect the next data to pick up will be tourist visits into the UK, which would benefit Merlin’s attractions.”

On the group’s theme parks, HSBC thinks recovery is happening faster than anticipated. Like-for-like sales were down 18.1% in the second half of 2015 and improved to a 10.2% decline in the first half of 2016. HSBC estimates a 19% increase in like-for-like sales in the third quarter, compared to a 21% decrease the same period last year.

“We would expect this pace of recovery to continue into 2017,” HSBC said.

“Together with cost savings, new attractions, accommodation and a rise in the “staycation”, we forecast Resort Theme Parks earnings before interest, tax, depreciation and amortisation (EBITDA) to return to 2014 levels of £87m by 2017 rather than the market’s expectation of 2018.”

HSBC said Merlin is one the most diversified companies in the sector by geography and exposure to tourist and domestic customers. The company also generates enough cash to organically double earnings per share over the next five years, the bank added.