Broker tips: Inchcape, Whitbread, Rightmove
Jefferies initiated coverage on shares of car retailer Inchcape at 'buy' with an 845p price target on Tuesday, arguing that the "undervalued" distributor could drive upgrades by applying material surplus cash flow to M&A or share buybacks.
"Inchcape's valuation does not represent its repositioned business, strong cash flow and potential for upgrades," it said. "After a period of estimate resetting we now expect Inchcape to positive re-rate from depressed valuation multiples."
The US bank pointed out that Inchcape proactively seeks M&A targets and has completed eight distribution deals and two distribution acquisitions in the last few years. It estimated £0.9bn-£1bn of cumulative acquisition or share buyback firepower is possible over the next three years, with implied 23% to 48% earnings per share accretion.
Jefferies said it sees a sustainable role for automotive distributors, especially those focused on small and medium-sized markets.
"Inchcape is reshaping to address the opportunity with profitability increasingly weighted towards higher-margin, higher-return distribution, away from lower-margin, lower-return retail (93% of profits from distribution versus 71% in FY14).
"We see a greater understanding of the new shape as a key valuation re-rating driver."
Investors should stick with Whitbread shares despite weak trading because it is financially strong and a potential takeover target, Canaccord Genuity said.
Nigel Parson, Canaccord’s analyst, reiterated his ‘hold’ recommendation on Whitbread and left his price target of £51 unchanged after the budget hotel operator warned that economic uncertainty had reduced demand for its hotels.
Whitbread sold the Costa coffee chain in January, leaving the owner of Premier Inn with a business focused on its Premier Inn hotels. Parson said that although investors were disappointed by the trading update, the shares should be supported by Whitbread’s plan to return £2.5bn of Costa sale proceeds to shareholders.
He also said that the valuation was underpinned by about £5bn of freehold assets and a good record of weathering difficult markets. Whitbread could also be bought, he added.
“We retain our ‘hold’ recommendation, as we believe [Whitbread] remains vulnerable to takeover by a global hotel player acting in consort with a property fund or private equity,” Parson wrote in a note to clients. “Potential buyers could include InterContinental Hotels and Marriott or private equity.”
Parson said his estimate of a 1% decline in revenue per room this year may be too optimistic. Consensus forecasts for annual profit are likely to decline to a range of £400m to £415m, he added.
Deutsche Bank downgraded its recommendation on Rightmove to 'hold' from 'buy' on Tuesday as the stock nears its new price target of 530p, down from 550p.
DB said Rightmove is the clear market leader in the UK online classified property vertical.
"With 76% share of time spent on the top four property classifieds and three/six times more monthly visits than No.2 /No.3 player, the Rightmove portal is a 'must have' for estate and letting agents to reach the widest possible audience of UK house hunters," it said.
However, the bank argued that the company's leadership position is now priced in.
DB still reckons Rightmove is well positioned to weather both competitive and cyclical pressures, thanks to its robust position providing premium products beyond basic listing, data insight tools and leads to agent clients. In addition, it said new product initiatives like the Rightmove Passport for tenants offer potential upside.
"However, as consensus partly caught up with our more bullish estimates, sentiment about exposure to the cycle is more muted and valuation appears more fair," it said, hence the downgrade.