Broker tips: M&S, Hurricane Energy, Tesco
Goldman Sachs reinstated coverage on shares of Marks & Spencer at ‘sell’ on Monday, with a 170p price target, noting that the completed joint venture with Ocado has little impact on free cash flow estimates.
For 2020, GS forecasts JV revenue of £1.7bn, up 11.5% year-on-year and a 2.2% EBITDA margin, driving partial year associated income of £5.6m.
The bank said recent M&S trading patterns have continued to be disappointing, with Kantar first-quarter 2020 M&S UK clothing sales down 8%, while food sales are down 1%.
"We note that the Kantar July M&S clothing sales are also circa -8% year-on-year, representing a poor start to 2Q20E," it said.
Goldman said the JV and weak 1Q20 trading drive a 5.7%/4.3% reduction in its FY20/21 earnings per share estimates to 18.9p/18.8p, respectively.
"Our 170p discounted cash flow-derived 12-month price target implies a 9x FY20E EV/EBIT multiple (9x price-to-earnings).
"With UK peers trading between 6-13x and 10% downside to our price target (versus +18% coverage average), we reinstate with a ‘sell’ rating on the shares."
Analysts at Berenberg reiterated their 'buy' recommendation and 100.0p target price for shares of Hurricane Energy following the latest update from the company on its Lancaster Early Production Scheme, but cautioned that it was still "early days" and that more data was needed in order to better understand the resource potential of the reservoir.
Sustained production for six to 12 months was needed and perhaps also more wells drilled across its assets in order to better understand the reservoir.
Nonetheless, analysts Ilkin Karimli and Jason Turner conceded that output from the EPS was averaging "significantly" higher rates than they had anticipated and that aquifer water was not encountered in the reservoir.
"While the data collected so far is encouraging, it is still early days. Hurricane is pioneering fractured basement plays in the UK and as such will require more data to better understand the resource potential," they said.
"We, therefore, believe it is too early to derisk a full-field development potential at Lancaster and keep our risk factors unchanged in the NAV."
In terms of valuation, the Lancaster EPS, net of financials, was responsible for the firm's core net asset value, with a full-field development of the Lancaster and Greater Warwick Area fields offering contingent upside.
Ahead of supermarket giant Tesco's interim results next month, analysts at Shore Capital Markets took a fresh look at the group on Monday, reiterating their 'buy' rating as a result of a " quantum of considerable solace".
At its successful Capital Markets Day in June, group chief executive Dave Lewis set out the company's priorities around quantum sales growth, maxing the mix and a focus on costs to drive cash profitability.
In doing so, ShoreCap anticipated that "already robust solvency ratios" were set to further improve, and the visibility and sustainability of the group's dividend should "positively develop", noting the guidance for two-times EPS cover by February 2020.
While the broker said the summer of 2019 was always going to be a challenge for major UK supermarket groups when set against the "almost perfect" trading conditions seen in 2018, it forecast first-half pre-tax profits of £948m, marking a year-on-year growth of just under 30%. For the full year, ShoreCap continued to forecast roughly 12% growth to £2.02bn.
However, ShoreCap did expect the grocer's like-for-like UK sales to be down 1.6% through the second quarter of its 2020 trading year as a result of a "slightly negative impact" from a "more focused and resourceful" Sainsbury's, the attrition of new space openings by German discounters and "a very rational internal approach" to managing its volume/value mix.
ShoreCap did highlight potential benefits stemming from the shuttering of Tesco Direct stores in the UK after the unit lost over £20m in the first half of its prior trading year.