Broker tips: Pearson, Associated British Foods
Shares in publisher Pearson were under the cosh on Monday as Berenberg said the company was "far from a turnaround" and profits are likely to decline in 2020.
The bank, which rates the stock at 'sell', said it was cutting its estimates to reflect the fact that the K12 school textbook business has now been sold, FX has deteriorated versus the basis on which guidance was set and the profitability of the US education business was notably below Berenberg's expectations last year, making a lower base from which to form its 2019 projections.
Berenberg, which retained its 600p price target on the stock, said conditions will remain exceptionally difficult in the US higher education courseware business, with competitors introducing new, lower-cost business models that answer students’ requirements for cheaper, quality materials. The bank said Pearson is likely to lose market share to these new models.
"We believe Pearson is far from a turnaround, given the high operating leverage at its US higher education courseware business, which faces major structural and countercyclical headwinds.
"In the short term, the numbers may be sustained by cost savings, but as early as next year, savings will be neutralised by general cost inflation, and we, therefore, expect profits to decline in 2020 versus 2019."
Berenberg said the current valuation fails to reflect this "very challenging" outlook for earnings.
Analysts at Shore Capital were impressed with Primark owner Associated British Foods' "solid" trading in the 24 weeks to 2 March.
Shore Cap said the key feature of ABF's statement was its unchanged outlook, with management expecting adjusted earnings per share to be "in line with last year", leading the broker to leave its own EPS forecast unchanged at 135.7p.
With Primark sales up 4% as a result of new space, Shore Cap saw UK trading as being positive since its last update despite turning in flat like-for-like sales, while in Europe total sales increased 5%, again driven by new space, and like-for-like sales dropped 3%, almost entirely driven by Germany where sales fell 10%.
In the US, stores continued to "perform strongly" as ABF's focus on optimising space and costs had "much reduced" its operating loss against previous guidance.
In terms of its sugar business, guidance and outlook remained unchanged, with the EU sugar price seen continuing to strengthen on the back of reductions in the European crop area over the next two years, something Shore Cap expects to lead to a rebound in ABF's sugar profitability in 2020, alongside lower beet costs.
However, the broker estimates a loss of £5-10m through the first half of the year before the unit commences its recovery in the last six months of 2019.
ABF upped profit guidance for its grocery arm, despite headwinds from the £12m Twinings Ovaltine supply chain consolidation, something Shore Cap saw as indicating high single to low double-digit growth on an underlying basis.
"Overall, a solid update from ABF, with few if any surprises," said Shore Cap, which reiterated its 'buy' recommendation on the group's shares.