Broker tips: McColl's Retail, Hunting, Bunzl
Analysts at Liberum upgraded corner store operator McColl's Retail Group from 'hold' to 'buy' on Friday, citing some "positive signs" in the group's most recent update.
Liberum said McColl's "deserves credit" for the stabilisation achieved in 2019 and its ability to deliver on promises set out at the time of the firm's interim results.
The analysts also said they weren't concerned about McColl's dividend suspension and stated the move was "sensible", while work continues to restore balance sheet health.
While Liberum noted that balance sheet health remained "a key risk to watch", the analysts said: "The shares have been harshly punished and we think the risks are now more than factored into the low valuation, which may re-ignite talk around McColl's as an M&A target."
Dividend aside, Liberum said it saw "several signs of encouragement" in the group's preliminary results, with recent trading moving into positive like-for-like territory despite the severe weather in the past couple of weeks.
Liberum's adjusted full-year 2020 underlying earnings estimates increased marginally, based on a slightly more optimistic gross margin improvement. It also noted that McColl's net debt profile should fall quicker than previously, reflecting the dividend suspension and the group's imminent sale of its head office for £7.3m.
Hunting's Titan business is vulnerable to competition, Credit Suisse said as the investment bank reduced its target price for the energy services group's shares.
The analysts said the technological lead the Titan division had over its rivals in US shale is being eroded as new products are developed, squeezing Titan's margins from 28% in the first half of 2018 to 18% in the first half of 2019. With too much capacity in the US shale market, price pressure is a threat in 2020 as rivals battle with Titan for market share, they added.
CS stated the situation will get worse if the lower oil price reduces US shale activity further and the recovery in Hunting's other businesses ran out of steam in the second half of 2019. Farrell and Khamar cut their earnings forecasts for 2020/21 by 2% to be about 15% below consensus.
The bright spot in the results was the outlook for divisional regions, driven by the company's increasing exposure to the offshore energy market, the analysts said.
CS reduced its target price for Hunting to 370.0p from 410.0p and maintained their 'neutral' rating.
Analysts at RBC Capital Markets bumped up their target price for shares of distribution and outsourcing outfit Bunzl but stayed at 'underperform' on the shares in expectation of "structural pressure" on its end markets.
Their estimates for the company's earnings per share in 2020-21 were revised higher by 7% and 6%, respectively, on the back of its better-than-expected margins in the back half of 2019 and recently announced mergers and acquisitions.
That led them to raise their target price for the shares from 1,700p to 1,800p.
However, due to the structural pressures anticipated in Bunzl's end markets, the question marks around its pricing power with large customers, the firm would become increasingly reliant on M&A which would place further pressure on its margins.