Broker tips: Ocado, G4S, AB Foods
Numis reiterated a ‘buy’ rating and target price of 400p on Ocado Group on Tuesday after the online grocer reported growth in first half revenue and earnings.
The company posted a 5.7% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to £40.4m and revenue rose 14.1% to £584.2m.
The FTSE 250 firm saw profit before tax hit £8.5m, up from £7.2m, although cash and cash equivalents dropped to £52.7m from £70.4m by the end of the 24 week period.
Ocado chief executive Tim Steiner said “the market remains competitive with ongoing price deflation but our increasing scale and operational efficiencies meant that we still grew profits, albeit at a slower rate”.
He said the company has been gaining share in the online grocery market, and expects this to continue.
Steiner added that testing of the company’s new proprietary fulfilment and software solutions in its third facility in Andover was progressing well and they expected to move on from the test phase in the autumn post the quieter summer period.
“Regarding an international deal, there is no new news – Ocado states that it remains ‘confident in its ability to sign multiple deals in the medium term’, while it is in ‘continued discussions with many potential international retailers to adopt the OSP’,” Numis said.
“The lack of deal announcement, competition-led downgrades, and investor concerns around competition (albeit Amazon Fresh is having no impact on trading) look set to continue to weigh on the shares, but we retain our positive stance, continuing to believe that central fulfilment is the best model and that Ocado has the leading global solution.”
Credit Suisse upgraded security services company G4S to ‘outperform’ from ‘neutral’ and lifted the price target to 210p from 200p, pointing to four main reasons for the move.
It said G4S would benefit greatly from sterling weakness, which the Swiss bank reckons will fall 10% across the board from its pre-referendum levels.
In addition, it argued that while the company has had more than its share of issues in recent years, the vast majority of its underlying business is stable and defensive.
CS said it expects asset sales over the next 18 months, which combined with improved working capital management, should lead to de-leveraging and free cash flow coverage of the dividend.
Finally it said that at 9.6x estimated 2017 price-to-earnings with a covered 5.4% dividend yield, the valuation is attractive.
“The key risks are that the asset sale process is delayed by market uncertainty resulting in a protracted period of high leverage and a 2016E dividend yield that is only just covered by FCF.
“We continue to see structural headwinds in the cash solutions business, which will only be partially offset by growth in cash outsourcing in the US. We capture this in our sum of the parts valuation.”
Berenberg upgraded Primark owner Associated British Foods to ‘buy’ from ‘hold’ but cut the price target to 2,760p from 3,450p.
The bank noted shares have dropped more than 30% in the last three months and 20% in the last month alone, providing an entry point.
It argued that initially, fears were around trading momentum in the UK which was -1% at the first half due to the poor performance of the high street generally and unseasonable weather.
Berenberg said the company’s third-quarter update on 7 July is likely to confirm such fears and guidance may come under pressure.
“While the current macroeconomic uncertainty revolving around Brexit (including wild FX movements with GBP -10% versus the US dollar in the last week affecting Primark’s margins) does not help sentiment, we believe that with the shares now trading on 20x calendar 2017 P/E on our forecasts (27x average since 2014) this offers the best entry point in nearly three years.”
The bank said it still believes in the longer-term potential for the Primark rollout. It also said that sugar profits look set to take off again, having collapsed from £506m in 2012 to £43m in 2015 given near-term dynamics in global sugar prices.