Broker tips: Ocado, Spectris, Rolls-Royce, Amigo
Societe General sees Ocado shares as "significantly overvalued" after the online grocery group hit a new all-time high, reiterating its 'sell' rating.
The FTSE 100 company announced a sixth overseas deal on Tuesday, with Australia's Coles Group signing up for the Ocado Solutions platform and two of the massive robot-operated customer fulfilment centres in Sydney and Melbourne.
Looking back on the past 18 months, the French bank had "no difficulty acknowledging" that Ocado's technology is very efficient and that management has been "doing a good job" striking international partnerships in Europe, Canada and the US.
The key rhetorical question for analysts, however, was "what is priced in already by the market?"
From a valuation standpoint, SocGen values each international CFC at circa 15p per share "on the basis of favourable assumptions", ie a 5% fee on capacity and 100% capacity in the third year.
"At current share price levels, we calculate that the ‘market’ is factoring in circa 30 additional CFCs over and above the 25 already contracted for.
"So fundamentally we think the stock is significantly overvalued following a circa 60% jump since the start of the year."
The analysts pointed out that Ocado's sale of 50% of its UK retail business to Marks & Spencer "did not have a surprisingly positive impact on the value" of the UK retail business.
Looking at the coming three or four years, with 25 CFCs to build all around the world, SocGen said "execution will be key" and said, "in particular as it could have an impact on the group’s ability to seal more long-term deals".
Spectris was under the cosh on Tuesday as Goldman Sachs cut its recommendation to 'sell' from 'neutral' as it forecasts weak sector-relative growth, returns and cash conversion over the next two years despite the stock being valued at a premium to the sector.
It noted that Spectris trades at a premium of about 8% to the European capital goods sector on 12-month forward EV/EBIT, versus a 5% discount historically.
Goldman, which slashed its price target to 2,200p from 2,600p, said the company's end market trends and FY18 results do not support the 15% year-to-date increase in the share price.
"While we see positives in new management’s restructuring plan, we believe any near-term benefits are likely to be offset by slowing growth, an uncertain capex backdrop and cost inflation," GS said.
It lowered its comparable 2019/20 EBIT forecasts by 12%/14% post results and said it's now around 10% below 2019 company-compiled consensus on underlying earnings per share.
Goldman said it expects Spectris’ comparable EBIT margin to decline to 150 basis points in 2019 and for this to be the year with the lowest return on invested capital post the Great Recession.
JPMorgan Cazenove cut its price target on Rolls-Royce to 650p from 700p as it made additional cuts to its earnings per share estimates, citing soft guidance on the company's EBITA margins.
JPM pointed out that its initial note following RR's FY18 results on 28 February focused mainly on the many exceptional items and accounting issues.
"But we were so bogged down in the detail we missed the most negative thing," it said in a note on Tuesday. "In the results meeting, for the first time, RR’s CFO gave 'soft' guidance on 'RR defined EBITA margins' for 2023-24: the guidance is below our expectations and well below that of some of the bulls."
JPM said that despite very large EPS cuts in its initial post-results note, it is now cutting its 2020-22 EPS forecasts by an additional 7%/10%/15%.
"Some bulls tell us they assume 2023-24 group EBITA margins of 12%17," JPM said. "If EBITA is much lower than many expect through to 2023-24, then it is likely that more of the expected free cash flow will be from working capital and customer prepayments, as we have argued multiple times before."
JPM rates RR at 'underweight'.
Analysts at RBC Capital Markets dropped their target price on British guarantor loans lender Amigo on Tuesday but still feel the firm is being "undervalued" by both markets and the regulator.
In RBC's view, guarantor lending has attracted "disproportionate regulatory attention" of late, and with Amigo's share price close to valuing the shares at its runoff value, the Canadian broker saw fit to reiterate its 'outperform' rating on the stock.
"We estimate that if Amigo's loan book stays constant, the ex-growth value is 230p - some 42% potential upside. If we assume the book is put into runoff, we estimate the value of the company at only 15% below the current share price," said RBC.
While the FCA had expressed concern about the "considerable increase" in the proportion of guarantor loan repayments, Amigo had reported a flat guarantor payment trend, leaving RBC struggling to square off the regulator's comments on the issue.
RBC also pointed out that complaints at Amigo fell 18% year-on-year throughout the first half compared to total consumer credit companies which saw complaints increase 40%.
"Amigo's 40-50% ROE business model, when compared to other non- standard finance lenders, is on lower interest rates, similar impairments, and scaled up by substantial operating leverage. We think it is inequitable to penalise a product where the superior ROE is driven by greater efficiency compared to companies with higher APRs."
RBC, which dropped its target price on Amigo's shares from 345p to 33p, also believes the shares were "pricing in a lot" given the strength of the business.