Broker tips: Just Eat, CYBG, Virgin Money

Deutsche Bank downgraded Just Eat from 'hold' to 'sell' on Monday as it cut its profit forecasts and target price for the shares due to the online food delivery group's new investment plan.

"We think Just Eat's investment plan makes strategic sense, but with substantial implementation risks, additional costs and an uncertain return. Management hasn't committed to a particular level of spend beyond 2018 but we think investment will continue at a rapid rate," the bank said as it cut Just Eat's target price to 630p from 830p.

DB cut its forecast numbers on Just Eat by 20-30% for 2018-2020 as it lowered its long-term EBITDA margin assumption for the group from 50% to 33%, while still an improvement from 25% in 2018E, it was revised to a more moderate figure as "delivery is fundamentally a lower-margin/lower-return business".

"When GrubHub expanded into delivery, they had an early mover advantage in the US as UberEats had only just launched. More recent example from Takeaway.com shows that it's hard to make delivery profitable," Deutsche's analysts said.

"In delivery, Just Eat doesn't have the first mover advantage," the analysts concluded.

Jefferies changed its stance on challenger banks CYBG and Virgin Money on Monday, upgrading the former as it downgraded the latter.

It said the 8% pullback in CYBG shares year-to-date is a buying opportunity, as it lifted the stock to 'buy' from 'hold'. It forecasts an 11% return on tangible equity in 2010 versus 7% in 2017, with return potential boosted by the upcoming catalysts of internal ratings-based and SME growth via the RBS remedies package.

"We see CYBG as a big winner from the RBS remedies package, with SME customers likely to be on-boarded as soon as June," it said.

"A previously aborted bid for Williams & Glyn was made in the knowledge that there was a 90% product capability match between the banks, with CYBG already making a push into its traditional heartlands of the Midlands/North West. As such, we increase our SME loan compound annual growth rate through FY20 by two percentage points to 6%."

Meanwhile, Jefferies downgraded Virgin Money to 'hold' from 'buy', saying the shares will remain a "value trap" until the market sees proof of concept of the digital strategy, which is likely more than a year away.

The bank cut its 2019-21 pre-tax profit estimates by 13%, mostly on the back of lower mortgage growth aspirations versus prior expectations.