Broker tips: Croda, JD Wetherspoon, Sumo Group
Croda appears on track to pay its 2019 dividend despite the Covid-19 crisis, Liberum said as the broker raised its recommendation on the company's shares to 'buy' and increased its target price.
Of UK chemical companies, Croda is the most resilient in 2020 with limited exposure to cyclical sectors and ample liquidity, Liberum analysts said.
Less than 10% of revenue comes from auto and energy markets whereas about 60% is from the more reliable health, agriculture and personal care industries, Liberum said. Looking back to the financial crisis, the worst period for Croda was a 14% earnings decline in the first half of 2009 that was soon recouped, the analysts said.
Net debt was 1.4 times earnings at the end of 2019, comfortably above the 3.5 times covenant, meaning liquidity is no problem, analysts Adam Collins and William Larwood said. With many companies cancelling dividends, Croda appears in good shape to make its payout, they said.
"We don't know if the board will propose scrapping the 2019 proposed dividend at this week's [annual general meeting] but do not see any need to do so from a liquidity perspective," the analysts wrote in a note to clients.
Collins and Larwood raised their price target on Croda shares to €51 from €47 and upped their recommendation to 'buy' from 'hold'.
Jefferies upgraded JD Wetherspoon to ‘buy’ from ‘hold’ on Tuesday as it took a look at the UK pub and restaurant sector.
JDW's recent interims flagged no dividend, a capex cut, and a cost reduction programme, Jefferies noted.
"Depending on working capital movements, we see reasonable short-term liquidity. Wetherspoon’s strong position within the UK pub sector - clear price identity, consumer traction and well-located, now largely freehold estate - should allow JDW to return to former profitability as fast as any pub operator," it said.
"We previously baulked at valuation but now see value," it added. The bank cut its price target on the shares to 1,150p from 1,590p.
More broadly, Jefferies said operational and financial leverage in the leisure sector was previously relatively high, based on strong cash flows.
"With the 'zero revenue' scenario barely contemplated, share prices initially fell steeply as lockdown liquidity concerns rose.
"Lockdown duration and subsequent social distancing create further uncertainty for pubs and restaurants. Fund raisings may be required, but we see longer term opportunity and some attractive valuations."
Analysts at Canaccord Genuity reiterated their 'buy' rating on video games developer Sumo Group on Tuesday but noted that while demand had strengthened as a result of the Covid-19 pandemic, the outbreak had impacted recruitment.
Canaccord reduced 2020 sales estimates by 20% and adjusted underlying earnings estimates by 14% due to the Covid-19 impact, reflecting a lower estimated average direct full-time employee number for the year.
"Game development demand remains very strong and the scarce resource is once again skilled staff," said Canaccord.
However, assuming the lockdown period finished in June, the Canadian broker anticipates any logistical disruption, in addition to recruitment slowdown, would broadly be offset by cost base reductions.
"Obviously if the lockdown lasts longer than Q2, then this would impact FY20 more materially and have a more material knock-on effect on FY21," said Canaccord, which also reiterated its 200p target price on Sumo.
"Such is the strength of the games market we make minimal changes to FY21E," added the analysts.