Broker tips: AO World, OneSavings Bank, WH Smith, Bodycote
Online electrical goods retailer AO World slumped on Tuesday as Morgan Stanley downgraded its stance on the stock to ‘underweight’ from ‘equalweight’ and cut the price target to 135p from 170p.
The bank said its takeaway from the investor day in Germany was that management will not aggressively drive growth in Europe, with guidance for 30% growth over the next few years.
“Given the current trajectory (around 80% to 30% in 2Q to 3Q), even 30% may not be achievable without a significant step up in marketing spend.
“With the business still so early stage, we think developing traction in Europe will be a more gradual and volatile process.”
MS forecasts a FY17-21 28% compound annual growth rate in Europe and 8% in UK. This implies 10% for the group, £1bn by FY21.
The bank pointed out that given the European trajectory, there will need to be a step up in UK growth to reach guidance of £700-£736m for FY17, but said it remains unconvinced of AO’s long-term ability to win share.
“In the context of a more cautious macro outlook, a relatively weaker brand and strong competition, we do not see any reason why growth should meaningfully pick up.”
OneSavings Bank
Investec has “reluctantly” downgraded OneSavings Bank to ‘hold’ from ‘buy’, holding the price target at 385p.
The brokerage said OneSavings is “perfection”. However, it has been the best performing UK bank within its coverage year to date, with the shares up 126% since 27 June 2016, more than fully reversing an unwarranted post-Brexit selloff.
The stock trades on 2.8x H1 2016 tangible net asset value, which Investec reckons reflects its high return, high growth and low risk model, all of which it sees as broadly sustainable.
Following such outperformance, it now recommends taking profits, with a switch into buy-rated Aldermore or Shawbrook.
Investec said it does not expect any disappointment when the challenger bank reports its 2016 results on 16 March, but added that the market may have been paying better attention this time around.
“Although OneSavings has not suffered any recent sell-side recommendation downgrades, only one analyst’s published target price now anticipates further upside from here,” it said.
WH Smith
WH Smith got a boost as Investec also lifted the stock to ‘buy’ from ‘hold’ and bumped up the price target to 1,900p from 1,550p.
“With Travel now accounting for 58% of earnings before interest and taxes (FY16) and 25% of its Travel outlets based internationally, we believe WH Smith’s equity story is evolving into a play on a structurally growing global travel market.”
The brokerage reckons Travel could contribute around 70% to group profits in five years, with the company set to see an increase in its sustainable growth rate, helped by a higher proportion of directly run outlets. This should drive a higher rating, Investec said.
Its in-depth analysis of WH Smith’s International portfolio and historic development shows it has gained critical mass in several major geographies, such as the Middle East and Australia.
“The company is starting to have its early contract wins renewed and has recently won a number of ‘game changing’ contracts (Germany and Spain), which opens up the European Travel market. It has also won 10 units in Singapore, the sixth busiest International airport in the world.”
Bodycote
HSBC has downgraded Bodycote to ‘hold’ from ‘buy’ with an unchanged target price of 675p ahead of the metal-treating specialist’s 2016 results, as it believes its stock is currently fairly valued.
The bank downgraded the FTSE 250 company as its shares have gained about 23% since December and have outperformed the FTSE 100 by 14% over the same period.
It said that Bodycote’s action on its footprint and a selective focus on business mix have led to improved growth and margins, and it thinks that the recent economic malaise is a further opportunity for the company to demonstrate its enhanced earnings quality.
“We see long-term margin expansion potential driven by new technologies, as adoption rates evolve and the positive impact from its core activities as global network build-out continues; and Bodycote has a nil-geared balance sheet and is highly cash-generative given its high margins (mid-teen), limited working capital requirements, low pension deficit and low maintenance capex requirements,” analysts wrote.
HSBC’s unchanged target price of 675p equates to a 2018 estimated exit price/earnings ratio of 15.3 times and a 2018 estimated exit enterprise value to earnings before interest, tax depreciation and amortisation (EBITDA) of 6.7 times. The target price implies a downside of 4.9%.
Bodycote will publish results for the 2016 financial year on 28 February and HSBC expects second half sales to rise 9% year-on-year to £290m buoyed by a strong foreign exchange gain, which will offset a 6% organic decline due to sequential improvement in the fourth quarter.
HSBC also expects full year revenue to grow 2.5% to £581m and a headline operating profit margin of 17.4%, down 60 basis points, driving headline operating profit of £101m, down 1%.