Broker tips: Sophos, Crest Nicolson, Inchcape

Sophos got a boost on Wednesday as Liberum initiated coverage of the security software and hardware company with a 'buy' rating and 530p price target, saying it expects billings to return to fast growth in the second half.

The brokerage noted that Sophos shares have been battered year-to-date, down 17% due to perceived competitive pressures and a disappointing first-quarter billings growth rate of 6%.

"However, the company has a leading cloud platform which combined with top-performing products can drive cross-selling into existing and new customers. We expect billings to return to fast growth in H2, and the mid-term guidance of circa $1bn in billings remains deliverable, in our view."

Liberum said Sophos Central is a "superb" cross-selling tool, easy to use and allowing partners and managers to perform diagnosis routines on customers' systems. It noted that the platform currently has more than 65,000 signed up customers and generated $186m in billings in FY18.

"While we do not forecast Sophos Central separately, going forward we believe it will be a crucial contributor to both billings and revenue growth," it said.

It also highlighted the group's Synchronised Security offering, which allows cybersecurity applications to communicate between each other when suspicious behaviour or threats are identified.

"Our analysis has identified that intelligence sharing is one of the prominent trends in cybersecurity, and we believe Sophos has a first mover advantage in this space. In our view, Synchronised Security can become a significant billings driver, as the more products customers acquire, the more ring-fenced against threats virtual environments become."

After housebuilder Crest Nicholson issued another profit warning on Wednesday, analysts were disappointed but tried to look for the positives.

Crest Nicholson said PBT for 2018 will fall to £170-190m, around 12% short of City expectations, as the housing market remained tough in London and for houses at higher price points in the South East, with none of the hoped-for uptick in the traditional autumn selling season.

The company's finance director has departed and former chief executive Steve Stone, who had moved up to chairman, is returning to an operational role.

Broker Shore Capital said the issue is the same as in previous warnings, namely a very tough market at higher price points, especially beyond the limits of help to buy, and problems completing sales where buyers also need to sell a house in the second-hand market.

"The problem is really one of affordability although the industry is keen to blame Brexit," said ShoreCap's Robin Hardy, noting that Bellway earlier in the week acknowledged that Brexit actually barely registers outside London.

JPMorgan Cazenove said: "While there might be scope to be more positive on the medium term strategy today, the material profit downgrade should still be viewed negatively and we still see risk that Crest’s core markets deteriorate further."

Peel Hunt based its revised target price of 330p on forecast tangible NAV for FY18. "Bid speculation may increase if the shares fall significantly below this level, as we saw with Bovis in 2017. However, we also believe that the ongoing trading backdrop, potential for some modest land write-downs and ongoing operational issues will keep a lid on the share price. Hold."

UBS also saw "downside protection" from valuation, with the shares trading slightly below book value and 10% dividend yield.

House broker Liberum cut EPS estimates by 14-22% across 2018-2020, pitching its 2018 estimate towards the lower end of the range at £175m announced and taking management's guidance literally that it is aiming to maintain PBT in 2019.

In other news, HSBC slashed its target price on automotive distributor Inchcape to 650p from 840p on Wednesday.

The bank, which kept its 'hold' rating on Inchcape unchanged, said that macro and currency risks had all come to a head, leading to its "justified" reassessment the of firm's value.

HSBC pointed out that new car total industry volume across the UK had fallen 20.5% in September to 339,000, while diesel was down 43% - a marked decline on the first half that led to a significant revenue loss for Inchcape.

New car TIV fell 5.5% in Australia throughout September to 94,000, extending the measure's decline from the first half as a result of dwindling demand in New South Wales where weakening house prices had impacted demand for big-ticket purchases.

HSBC's analysts also felt that negative FX movements, driven by the impact of the strengthening of the Japanese yen against the Australian dollar, had led to an increase in the projected cost of exporting Subaru products to Australia.

"At current spot rates, this is expected to impact Australia reported treading profits by £20m in FY19e."