Broker tips: Debenhams, IAG, CRH, Genus
Department store Debenhams was under the cosh after Berenberg downgraded the stock to ‘sell’ from ‘hold’ and cut the price target to 46p from 75p.
It said the UK market share and top-line growth are under threat, hindered by an undifferentiated customer proposition to that of peers in an increasingly competitive market.
In addition, the bank pointed out that Debenhams is severely structurally challenged by prohibitively long store leases, which restrict it from adapting to declining footfall and the transition of sales online.
Berenberg acknowledged the opportunity in international markets online, which is the group’s fastest-growing division, but said this will be limited until further investments are made to its proposition.
The bank noted Debenhams has suffered four consecutive years of UK store like-for-like sales decline amid fierce competition in the retail sector and evolving consumer behaviour.
“As its online sales lose momentum and the off-line department store market in the UK continues to shrink as a proportion of the non-food retailing market, we forecast that UK gross transaction value growth will slow from 1.4% over the last three years to a 0.7% three-year compound annual growth rate.”
Berenberg said Debenhams’ inferior customer proposition will continue to deliver weak top-line growth. In particular, it highlighted serious shortcomings in the company’s service, product, e-commerce proposition, and the location of its stores.
International Consolidated Airlines Group
HSBC has downgraded International Consolidated Airlines Group (IAG) to 'Reduce' from 'Hold' and raised its target price to 490p from 450p as it believes that the Anglo-Spanish airline is a “great company” but “not as great as the market believes”.
The bank said that the British Airways and Iberia owner is the “best-run legacy airline in Europe” with advantages from labour relations and Heathrow airport but sees cashflows challenged in the future along with a vulnerable North Atlantic and Aer Lingus outlook.
It said that IAG experienced clean trading despite BA cabin crew strikes last year, manages its low cost platform with no influence from legacy labour groups, has a long haul premium catchment at Heathrow airport and its exposure to the North Atlantic keeps it away from challenges from Gulf carriers.
But HSBC expects to see its cashflows challenged as it delivered negative cashflows following a focus on gross capital expenditure.
“Cash returns are underpinned by the €1.7bn sale of assets. IAG continues to face a high capital expenditure burden as it works through the legacy of the 2001 ‘Spurlock spurt’ that reflected BA in a condensed period of time. IAG’s moderate capital expenditure guidance from capital markets day relies highly on sales and leasebacks to fund cash returns. This is not as sustainable,though to be fair the fleet demographic problem should also be time-limited.”
Aer Lingus has outperformed HSBC’s expectations since IAG’s €1.4bn takeover in August 2015 as it supported the company's “relatively soft landing” 2016 results, but the bank is unsure of the sustainability of its margins, given the expansion of Norwegian carriers in the North Atlantic, a key market for Aer Lingus.
HSBC is also cautious about trading in the North Atlantic given growth by secondary European carriers, long haul, low cost carriers, the deployment of 737MAX and A320NEO aircrafts and the growth ambitions of Air Canada and Aer Lingus.
CRH
Analysts at Canaccord Genuity hiked their target price on shares of CRH, telling clients they expected growth momentum in the firm's main markets to be sustained over the next couple of years.
Acquisition spend would also return to more normalised levels, Aynsley Lammin and Matthew Walker said in a research report sent to clients.
Canaccord revised its target price from €35.0 to €37.0 while reiterating its recommendation to 'Hold'.
In the US, greater clarity from the Fixing America's Transportation Act as well as Trump's push on infrastructure, they said.
Pricing in Europe would not match that in the States, they admitted, but Europe did look set to continue enjoying a modest recovery in volumes.
Acquisitions would continue, but the focus of deals would be enhancing earnings, the analysts said.
CRH had the potential to reach and beat its previous peak margins and returns, Lammin and Walker added.
"Valuation is not particularly cheap but ... we see further upside on a medium-term view, especially if acquisitions are made at attractive multiples ... There is also the potential for a more significant infrastructure spend and lower tax rate in the US to boost earnings over the medium-term."
Genus
Liberum upgraded animal genetics company Genus to ‘buy’ from ‘hold’ and kept the price target at 1,950p.
It noted the share price has dropped 9% over the last three months despite the outlook for the group remaining solid.
Liberum said trading was driven by structural royalty growth opportunities in Asia PIC and a strengthened position in EU PIC following the acquisition and partnership with Hermitage.
The brokerage also pointed to a gradual rise in Genus ABS market share under a new chief operating officer strengthening sales and strategy execution, an own proprietary dairy and beef nucleus herd, the launch of its proprietary sexed semen technology later this year, and development of the IVB's In Vitro Fertilisation technology and expansion of the customer base.
Liberum expects Genus to deliver a double-digit three-year forward earnings per share compound annual growth rate and forecasts an FX tailwind of around 10% on full-year 2017 earnings before interest and taxes.
The brokerage said Genus generates only about 10% of group sales and profits in the UK. In the first half of this year, the weaker pound brought a helpful translation benefit to reported results of £3.7m, mostly against the US dollar.