Broker tips: Hays, Softcat, JD Sports
Credit Suisse has downgraded shares of Hays, citing looming threats to organic growth in some of the recruiter’s core markets.
The bank downgraded its rating to ‘underperform’ from ‘neutral’, though it left the price target unchanged at 140p.
It also reduced earnings estimates, with earnings per share falling 4-7% for the full-years 2020-2022, and forecasts for earnings before interest, taxation and amortisation now 2-4.5% below company-compiled consensus.
Analyst Andrew Grobler said: "Our Credit Suisse lead indicator continues to incrementally decline and we expect organic growth to weaken further through the second quarter as macro headwinds in the UK, China and Germany impact demand."
Last month, shares in Hays jumped after the recruiter said strong growth in net fees in the US and China had helped offset other, slowing markets in the first quarter.
But Grobler said: "While Hays reported more resilient growth rates in the first quarter than peers PageGroup and Robert Walters, we think that, to a large extent, this reflects different revenue recognition protocols, with Hays recognising revenues when the candidate starts, while Page recognises revenue when the contract is agreed. This leads to a lag in performance for Hays on major shifts in demand.
"In addition to our short-term caution, we continue to see incremental pressure on agency profitability as technology enables major corporate to either bypass agencies, reduces a number of roles previously filled by temps/contractors or encourages downward pressure on pricing."
Berenberg downgraded its recommendation on shares of IT infrastructure provider Softcat to ‘hold’ from ‘buy’ on Monday following a recent run higher in the share price that has left the stock trading at a 45% premium to its long-term historical levels and a "significant" premium to global peers.
The bank noted that Softcat is now up 100% year-to-date after a "stellar" FY19 in which Berenberg upgraded estimates numerous times and the stock re-rated significantly.
"There is no doubt that Softcat has many avenues for substantial growth, as we highlighted in our 'poised to take market share' note in July, and we believe there is capacity for upgrades in the next 12 months," it said.
"However, we feel this is more than priced into the shares, as they now trade on circa 32x price-to-earnings and 25x EV/EBIT, which reflects premiums of circa 80% and circa 40% to, respectively, US and European IT infrastructure providers."
Berenberg said that at these levels, the positives are baked into the share price.
The bank kept its 1,100p price target on Softcat shares.
Analysts at Peel Hunt retained their 'buy' rating on sportswear retailer JD Sports on Monday, praising the group's performance on both sides of the Atlantic.
Peel Hunt said JD Sports had made "a positive start" in the US, with its Finish Line operation growing like-for-like sales and margins as JD best practices were introduced.
The broker noted there was an "interesting discussion" around the returns profile of roughly $1m attached to each of the seven stores refitted to JD Sports branding.
"These 'badge flips' are less capital intensive (sub $100k each): here JD is introducing its own clothing 'cages', but using the FL footwear fittings," highlighted the analysts.
Peel Hunt said JD's stronger merchandising could see a "more favourable" cash return on invested capital emerge and with the "lite" nature of the expended capital, the company could also see a quicker roll-out.
"We've been to Atlanta to see two badge flips: the stores feel unmistakably 'JD' and we suspect that this will be the way forward in the US, as well as some brand-building flagship stores in big cities," said Peel Hunt.
"Elsewhere we suspect that trading remains strong and we retain our enthusiastic 'buy' rating."
Peel Hunt stood by its 800p target price on the stock but said JD's current valuation implied "further strength in the UK and Europe" and noted it didn't expect the shares to "wait" at that price for long.