Broker tips: C&C Group, Royal Bank of Scotland, JD Sports
Analysts at Berenberg slashed their target price on brewer C&C Group on Thursday but upped their rating on the group from 'sell' to 'hold'.
Berenberg highlighted that C&C Group's share price had fallen by roughly 50% from its highs in early January since the government shut down the UK's bars, restaurants and pubs to help manage the effects of Covid-19, a move the analysts said was "understandable" given that the on-trade represented around 80% of the firm's net sales.
"With the brewer withdrawing mid-term guidance and taking immediate actions in the debt market, investor focus has unsurprisingly been on short-term liquidity requirements," said Berenberg.
However, the German bank's underlying view on the firm was unchanged and said it thinks C&C's funding levels should remain "sufficient", despite undoubted immediate-term stresses.
"Our monthly cash flow model shows that, in the worst month of H1 2021E, net debt peaks at c€305.2m, which is still within the c€550m of immediate-term liquidity (across a range of facilities) that C&C has at its disposal," concluded Berenberg.
Barclays upped its stance on Royal Bank of Scotland shares to ‘equal weight’ from ‘underweight’ on Thursday in a note on UK banks.
"We believe the market’s likely focus on capital/asset quality means RBS no longer warrants an underweight rating, despite our expectations of continued weak earnings beyond 2020," it said. Barclays cut its price target on RBS to 130p from 190p.
"While the potential for losses is high, we think UK bank shares effectively price in a severe downturn; we estimate current valuations imply £70bn of aggregate losses for our UK banks, or 50% off domestic bank capital," Barclays said.
"We expect a combination of painful rate cuts and weak activity to drive pre-provision profits down circa 20% year-on-year. Likely strong Q1 trading income could prove to be an aberration," it said.
RBC Capital Markets downgraded JD Sports to ‘sector perform’ from ‘outperform’ on Thursday, cutting the price target to 570p from 600p, arguing that the shares were no longer "as compelling".
"JD Sports has offered investors a compelling organic and acquisition led expansion story," it said. "However, near term returns are likely to be impacted by pressure on its higher fixed cost stores and on the young fashion market. We think its valuation largely discounts a strong recovery next year so move to sector perform."
RBC said store footfall is likely to remain soft for some time even when stores reopen. It noted that JD's online penetration has historically been on the low side.
"This is partly owing to its core younger customer base which has less access to credit cards. Around a third of online sales are click and collect which we expect to switch to home delivery while stores remain closed.
"However, even when they reopen we expect footfall to stores to return only gradually, which may put pressure on margins given the higher fixed costs of stores."
The bank also said that the young fashion market is likely to be challenging. "The highest proportion of employees in shut down sectors, eg retail and hospitality, are in the under 25 cohort which is where JD's core customer resides," it pointed out.