Broker tips: Halfords, Inmarsat, Hays

Halfords slumped on Thursday as Peel Hunt downgraded its stance on the stock to ‘sell’ from ‘hold’ and cut the price target to 325p from was 350p.

“Fundamental headwinds are increasing and the new store format doesn’t move the dial,” the brokerage said.

Peel said it doubts current consensus forecasts reflect that and it’s hard to see a reason to hold the shares.

It argued that rising oil prices mean fewer miles driven and less depreciation, which is bad news for car maintenance as weFit momentum wanes.

Meanwhile, in bikes, the replacement cycle is lengthening and price inflation may have a big impact on volumes.

“We are nervous about the cycle market’s growth in the next few years and Halfords’ performance alongside that. Our view is that the replacement cycle for bikes is getting longer: there was a move towards premiumisation about ten years back and since then, whilst miles cycled have increased in general, the volume of bike sales has flattened off.”

Peel said “more inspiration” is required across the group, adding that it was underwhelmed by its visit to Derby’s ‘store of the future’.

“The cash attractions here are clear, but gross margins and cost ratios are under pressure as well as like-for-likes, so forecasts are falling.”

Inmarsat

Satellite communications company Inmarsat got a boost on Thursday as Macquarie upgraded the stock to ‘outperform’ from 'neutral' and gave it a target price of 850p, saying it may at an inflection point.

Macquarie said it can no longer ignore a potential takeout scenario given the strategic value of Inmarsat’s global Ka/L-band footprint, access to niche markets generating above-peer 5%+ 3-year compound annual growth rate and sizeable spectrum holdings.

In addition, it pointed out that the shares are trading at a 10% discount to peers or 7x 2018 earnings before interest, taxes, depreciation and amortisation, which it reckons is enough to warrant a second look.

The bank also argued that while a guidance downgrade is likely on the 4Q16 call, consensus estimates for 2018 revenues are already below management’s long-term outlook, which looks baked into the price.

“4Q16 results will likely confirm what investors already suspected for a long time: the 2018 guidance issued in early 2016 is untenable amid delays in airline orders, regulatory approvals and sub mix headwinds in its bread and butter segment, Maritime.

“However, this may be more of a formality - consensus revenue expectations for 2018 have approached our $1.38bn estimate versus management’s $1.45-1.60bn outlook.”

Hays

Analysts at Credit Suisse bumped up their recommendation on shares of Hays, hailing the firm´s growth prospects, cash generation ability and the likelihood of a prolonged period of special dividends.

The broker´s Andy Grobler marked up his estimates for the global specialist recruitment group's earnings per share for 2017 and 2018 by 5.0% and 8.0%, respectively.

Hay´s international operations would grow at a 9% compound rate over each of the next three years, he said, with organic earnings before interest and taxes ahead by 12% for each year.

However, whereas Hay´s had projected that profits in Germany would double over the next five years, Credit Suisse was expecting growth of just 70%.

Grobler upgraded his recommendation the shares from 'Neutral' to 'Outperform' and his target price from 160.0p to 170.0p.

In Australia, the analyst said Hays was benefitting from its relationship with SEEK, providing a differentiated offering.

As regards dividends, London-based Hays was projected to have £48m of net cash sitting on its balance sheet by December 2017 and to begin returning excess cash, via special dividends, at the end of this fiscal year.

A focus on temp and consultancy, which accounted for 59.0% of group profit in the first half of 2017, provided a more stable cash profile than permanent recruitment.

This, Grobler said, should "support a prolonged period of special dividends, even if end markets slow."

Among the risks to watch out for the Swiss broker included technological disintermediation in its permanent recruitment operations.