Broker tips: Dunelm, McColl's, Kier

Homeware retailer Dunelm surged on Monday as Peel Hunt upped the stock to 'buy' from 'hold' and lifted the price target to 750p from 550p, citing catalysts for a recovery next year as the company sharpens up its act following a series of downgrades driven largely by the 2016 Worldstores acquisition.

Notwithstanding Brexit, the brokerage said it sees clear catalysts for recovery in 2019 from a renewed focus on the core offer, improved brand awareness and an accelerating online performance "as Dunelm fulfils its multi-channel potential".

"Shareholder returns will also benefit from the potential return of special dividends from next year," it said.

Peel argued that Dunelm is built on strong foundations. It pointed out that it's a UK market leader with a 5% rent-to-sales ratio and noted that it has 10% EBIT margins, 15% return on capital employed and one of the lowest levels of operational gearing in the sector.

"The distraction of the Worldstores acquisition and integration process had negatively impacted the performance of the core business. Since late summer, the core Dunelm proposition has visibly sharpened up, noting a step-up in trading performance in Q1 against very tough comparatives.

"With conservative trading assumptions built into market expectations, sales numbers look more than achievable if Dunelm can maintain current momentum."

Analysts at Liberum cut their target price on British convenience shop and newsagent operator McColl's Retail on Monday, citing persistent challenges in the group's supply chain.

Liberum dropped its target price on McColl's to 100p from its previous 150p mark after McColl's fourth-quarter update outlined continued supply chain disruptions that, "unfortunately", led the broker to lower its adjusted EBITDA forecasts by 22%-24%.

The broker highlighted the collapse of Palmer and Harvey and the group's transition to Morrisons supply as causing much of McColl's troubles in 2018.

Liberum, which maintained its 'hold' rating on McColl's, said the supply woes had also resulted in operational disruptions, a slower than planned roll-out of its Safeway ranges and some delay in buying negotiations.

When discussing the numbers, Liberum said: "FY18E net debt is a beat reflecting good working capital management and greater sale and leaseback proceeds than we anticipated. There is no guidance on the full year dividend at this stage, but we prudently lower our forecasts broadly in line with our EBITDA cuts."

McColl's shares tumbled in early trade after it issued a profit warning due to disruption from the collapse of wholesaler Palmer & Harvey.

Analysts at Liberum also put Kier under review on Monday, noting that, while it will give the construction services outfit a stronger balance sheet, last weeks' rights issue left the group's cash flow looking poor.

Kier secured backing to raise £264m in a rights issue to reduce borrowing as management saw increased risks associated with its net debt position.

The FTSE 250 group plans to issue 33 new shares at 409p per new share for every 50 existing shares on Friday in order to raise roughly £250m - a 34% discount to the theoretical ex-rights price.

Liberum, which previously had a 'buy' rating on Kier, said the issue resulted in "a stronger competitive position" and noted that it could, in time, result in higher margins.

Given the £650m in investment assets, which management opted not to sell, and the firm's expected net cash in June 2019, Liberum anticipates Kier's balance sheet "will be stronger" but also noted that "cash flow will look poor".

The broker reduced its 2019 and 2020 earnings per share by 33% and 42% to 85p and 93p on a post rights basis.

Over at Canaccord, analysts were surprised by the rights issue but noted it would "clearly improve the balance sheet and reduce the financial risk of the group".

While Peel Hunt noted that lender concerns towards construction exposure could have an impact on uncommitted facilities and future financings as "potential customers and clients are also increasingly focused on service providers balance sheets".