Broker tips: Dignity, Cobham, British American Tobacco, Greene King
Peel Hunt cut its stance on funeral services provider Dignity on Thursday as the Competition and Markets Authority said it was launching a full investigation into the funeral market after identifying "serious concerns" over large price hikes.
The brokerage downgraded Dignity to 'sell' from 'hold', citing greater risk on pricing as the CMA pointed out that the cost of arranging a funeral has risen more than two thirds in the past decade and almost three times the rate of inflation.
The CMA said that while some smaller funeral directors have sought to keep their prices low, other providers, in particular, the larger chains, have implemented policies of consistently high year-on-year price increases.
"A number of these have now introduced lower cost funeral options, but this doesn’t go far enough to make up for years of above-inflation price hikes," it said.
Peel Hunt said it was already concerned that price competition was becoming a way of life for Dignity rather than resulting in a short-term re-basement of forecasts.
"However, the CMA’s language is significantly more strident than expected and includes crems as well as funerals. In addition, the spotlight is firmly on Dignity and the Co-op with the focus on the larger chains as well as reference to recent price cuts."
Analysts at Berenberg upgraded technology and services innovator Cobham to 'buy' on Thursday, noting that a "turning point" in the aerospace and defence outfit's complex history was fast approaching.
Berenberg said the recent capital markets day was "significant", in its view, given Cobham's new management team appeared compelled to focus its message on business opportunities, rather than business improvements.
"We are under no illusion there is still much to do to improve operations and execution, and the shadow of the Boeing KC-46 contract will weigh on the shares until there is more clarity," analysts wrote.
However, the analysts believe 2018 will be the year earnings and cash flow through, and with the support of a strong balance sheet, the broker expects evidence of recovery to become "increasingly apparent through 2019".
The business outlook has also improved, with orders up 25% at the half-year, and said it now anticipates earnings and cash will return to growth in 2019 as operational improvements come through and provision payments phase out.
Despite Cobham shares now 25% off their August high and the group's risk/reward case seen as "much more favourable", Berenberg's target price was cut to 124p from 140p standing in order to reflect current peer multiples.
Analysts at RBC slashed their target price for shares of British American Tobacco from 3,400p to 2,700p, saying that the uncertainty around the outlook for its menthol cigarettes unit was casting a pall over the investment case for the company's shares.
However, the combined impact from the US regulator's ban on menthol cigarettes and from the expected erosion of its margins resulting from the uptake of Next Generation Products was now priced into the stock, the Canadian broker said, pointing to the shares' 40% underperformance relative to the European consumer staples space in 2018.
Hence, it upgraded its recommendation from 'underperform' to 'sector perform', even as it added that the future for British American Tobacco was "very opaque".
RBC used two methods to arrive at its valuation, an adjusted present value calculation and a sum-of-the-parts approach.
Under the former, the working assumption was that half of the company's sales from menthol cigarettes would go up in smoke by 2025, as well as 75% of its profits due to the under-recovery of fixed costs and narrower margins on those sales which migrated to NGPs.
Reflecting their own uncertainty, they also bumped up their estimate for the company's cost of equity by 50 basis points, resulting in a target price of 2700p per share.
Greene King shares are "deeply undervalued", broker Liberum believes, or "materially undervalued" as Peel Hunt has it.
Peel Hunt said it was holding its full-year forecasts even though the company is trading ahead of the numbers, as it "allows for a challenging macro backdrop" in the second half of the year.
The broker sees 688p per share net asset value as being supported by good trading and debt reduction, of which £63m was forecast this year.
With Greene King committed to paying a long-term dividend, yielding 6.5%, Peel Hunt said: "We believe the shares are materially undervalued prior to considering upgrade potential. In our view, the biggest upside to our forecasts is managed LFL sales (for which we assume just 1.4%)."
Liberum said the first half performance was "testament to the investment in value, service and quality alongside the brand optimisation programme" and that while cost inflation was "fierce" there was heartening progress to limit the net impact.
With the shares trading at just over eight times full-year EPS, Liberum analysts said: "We believe that the company’s strong cash generation can continue to cover schedules debt repayments, core capex and dividends with capital recycled from tail disposals to fund new builds."