Broker tips: Safestay, BBA Aviation
Analysts at Canaccord Genuity reiterated their 'buy' rating on a 50p target price on hostel operator Safestay on Wednesday, but warned that revenue-to-underlying earnings conversion was still "not where it should be".
Canaccord said Safestay's interims and recent announcements showed that revenues were growing "as expected", after "finally" deploying the proceeds of the group's successful December rights issue, with a 24% increase in turnover to £8.1m for the first half.
However, the Canadian broker said conversion to EBITDA was still lagging behind, leading the analysts to downgrade their EBITDA estimates by roughly £0.4m in order to reflect higher property, utility and maintenance costs, a delay in the conversion of Safestay's Brussels venue and higher customer acquisition costs.
Canaccord also noted that the adoption of IFRS 16 had inflated Safestay's interim EBITDA result by £1.15m, but reduced interim pre-tax profits by £300,000 due to offsetting higher depreciation and interest costs.
"At yesterday's close, Safestay was trading on an EV/EBITDA of 11.8x for FY19E falling to 10.7x for FY20x. Our 50p target price is based on a 20% discount to the adjusted NAV of 63.5p/share including the new valuation of the crown jewel, Elephant & Castle hostel of £26m, an increase of £10m, equivalent to an increase of 15.5p."
BBA Aviation was under the cosh on Wednesday as Berenberg cut its rating on the shares to ‘hold’ from ‘buy’ following the company’s first-half results and its disposal of parts distributor Ontic, pointing to a full valuation and limited near-term catalysts.
"With a more than 45% rally in the share price year-to-date, a key catalyst of our investment thesis playing out and signs of increasing margin pressure in the Signature flight support service, we think the risks are finely balanced over the near term," the bank said.
Berenberg said the sale of Ontic should support shares in the medium term, but with only one continuing division remaining, there is limited scope for further value creation from disposals, which was previously a key part of its investment thesis.
It added that while the potential for around $1bn of shareholder returns - about 25% of market cap - in the coming months will support the share price, shares are trading on circa 17x FY 2020E price-to-earnings, which is towards the upper end of its historical range.
Berenberg lifted its price target on the stock to 335p from 330p.
BBA announced in July that it was selling Ontic to private equity firm CVC Capital Partners in a $1.37bn deal, to focus on its airport services business.