Broker tips: Royal Mail, Standard Chartered, Unilever, Ryanair
Royal Mail shares continued to fall on Tuesday, a day after releasing a late-afternoon profit warning, as analysts downgraded their forecasts and ratings on the letters and parcels group.
The FTSE 100 group slashed its full-year profit guidance on the back of lower letter volumes, a dip in parcel profits and slower progress with cost-cutting since resolving industrial action in March. First-half productivity improved by just 0.1%, leaving the previous full-year target of nearly 3% well out of reach and with resulting consequences for 'cost avoidance' plans.
JPMorgan Cazenove on Tuesday downgraded its rating to 'underweight' from 'neutral' on the "worrying combination of accelerating letter volume declines and a vastly reduced rate of cost efficiencies".
Royal Mail's management "has not provided much evidence for why either of these should improve over time", was Caz's view.
Analysts at the bank said the dividend cover did not look sustainable, with its medium-term forecasts suggesting an uncovered dividend but directors of the company still reiterating their intention to pay an increased dividend for the full year. The price target was cut to 341p price target from 537p.
Morgan Stanley said it believed margins and cash flows could come under further significant pressure due to letter mail trends and cost base mitigation challenges, even if parcels revenue momentum is positive.
The bank noted that RMG has an attractive portfolio of London property, which management hopes to monetise, though there is uncertainty around this.
Analysts at Liberum slashed their target price to 250p from 415p on a profit warning that was "shocking in its scale and timing".
Shore Capital has retained its ‘buy’ recommendation for Standard Chartered, despite reports claiming that the bank is facing a $1.5bn fine related to Iran sanctions.
The British bank, which specialises in emerging markets, is being investigated by the US over historical sanctions compliance and a significant fine has already been pencilled in by the market.
But according to Bloomberg, the amount now being considered by the authorities is around $1.5bn, 50% higher than most estimates.
The shares were in the red in morning trading in London, off 5.5p at 610p.
But despite this, ShoreCap analysts retained their recommendation on the stock.
In a note to investors, they said: “Our fair value calculations for the big banks already include a discount for tail risk to capture legacy litigation and conduct risk. In the case of Standard Chartered, where we have a fair value of 935p, 52% upside, we apply a 5% discount, equivalent to $2.1bn, which is more than enough to capture the potential fine.”
Shore added that Standard Chartered has surplus capital of around $3.2bn, which was “more than enough to absorb a fine of such magnitude without requiring the group to raise fresh equity”.
Standard Chartered has not commented on any potential fine, other than to confirm that the bank is cooperating fully with the investigation.
The risk of a slowdown in emerging markets and a potential change in leadership has prompted analysts at Jefferies to downgrade Unilever, the Anglo-Dutch consumer goods group.
In a note to investors, analysts said that Unilever offered “an investable combination of a deliverable plan for profit and cash flow improvement, underpinned by a strong cultural imperative as the result of the failed Kraft bid”.
But they added that this was already been “fairly rewarded” in Unilever’s current valuation, “relative to which we think forecast risk is migrating to the downside, with slowing emerging markets a growing risk. A likely change of chief executive on a 12-month view and technical risks consequent on the single listing proposal are further complications.”
Jefferies has therefore reduced its recommendation to a ‘hold’ from a ‘buy’.
Unilever, which earlier this year saw off a £115bn hostile takeover bid from US rival Kraft Heinz, will later this year, end its historical Anglo-Dutch structure. The maker of Dove, Marmite and Ben & Jerry’s, which has made significant in-roads into emerging markets around the world, intends to make Rotterdam its main headquarters, become one legal Dutch entity and reorganise the business into three core divisions.
The decision is not without critics, however. Many had hoped the group would make London its headquarters, especially as the group is expected to drop out of the FTSE 100 once the move is completed in December. A number of shareholders have indicated they will vote again the switch.
Paul Polman has been chief executive since 2009 and speculation is growing that he will not remain in the post long term.
Lastly, analysts at Canaccord Genuity dropped their target price on low-cost carrier Ryanair on Tuesday, mainly related to recent strike action.
Despite Ryanair issuing a profit warning on Monday, cutting its full-year guidance from a range of €1.25bn-€1.35bn to a new range of €1.1bn-€1.2bn, the Canadian broker said the budget airline's longer-term outlook remained "attractive" given its low and sustainable cost base and a wide range of growth opportunities at primary and other airports.
Canaccord pointed out that the airline is highly profitable, with "enviously high double-digit net margins" and a consistent ability to generate an EBITDA of almost €2bn so that, despite chunky CAPEX commitments, it could continue returning cash to shareholders.
However, although Canaccord reiterated its 'buy' recommendation on the firm's shares, it reduced its target price from €19.70 per share to €16.60 on the back of the earnings downgrade and what it said was reduced short-term visibility.
"This premium is, in our view, justified by the attractive long-term growth prospects, superior margins and returns on capital, sustainable industry-leading cost base, growing exposure to primary airports and strong cash generation of the group," wrote analyst Gert Zonneveld.