Broker tips: William Hill, Morgan Advanced Materials, Mitie
Broker Peel Hunt said it believes there is a "buying opportunity" in William Hill shares after they were sent tumbling by interim results from the bookmaker on Friday, with Barclays also upgrading its recommendation for similar reasons.
Peel Hunt analysts think the opportunity comes from a "misunderstanding" of the results.
The analysts, Ivor Jones and Douglas Jack, cut their full-year forecasts for this year to £207m from £244m to account for start-up losses in the US business but increased those for 2019 to £226m from £207m, as William Hill laid out plans to invest $50-60m in the US.
"Our FY19E forecast assumes that the US business stabilises in order to give us a basis for valuation but in reality, if the business is successful in the US, there will be increased investment and lower profits," the analysts said in the note to clients on Monday morning.
In the half-year results, Hill's said it planned to invest in the US to make the most of the recent overturning of the former federal ban on sports betting. The company's US business reported a $17m operating loss in the half and there were $50-60m of additional costs flagged for the second half.
"Overall the US business (including the existing Nevada/Delaware business) is expected to roughly break even in 2018. The market appears to have taken fright at this apparent downgrade, as well as the over £800m write off relating to the UK retail business.
With a lot of bad news in the price and the shares trading for 13 times full-year earnings, with a yield of over 5%, the broker expects WH's share price to "bounce".
Morgan Advanced Materials rallied on Monday as Berenberg upgraded its stance on the stock to 'buy' from 'hold' and upped the price target to 420p from 330p as it said the first half results showed significant progress.
The bank noted that when it initiated coverage at 'hold' in September 2017, it had some concerns about organic growth and free cash flow generation. However, it said that since then, management has more than delivered on each of these metrics, a highlight being the 7.8% organic growth delivered in the first half of 2018.
In addition, the shares are up 17% since September, which Berenberg said begs the question whether it and potential new investors have missed the boat.
"We think not and believe this is just the start to further strong delivery," it said, as it increased its estimates by around 10%.
As far as the H1 numbers are concerned, Berenberg said the 7.8% organic sales growth and 12.4% organic EBITA growth were much stronger than it had expected, with improvements across every end market except industrial gas turbines.
"We have become increasingly confident that Morgan is now in the best shape it has been for many years. Financially, organic growth of 6.7% (2018E) and return on capital employed of 17.1% (2018E) are the highest since 2011 when Morgan was recovering from the financial crisis, and leverage of 1.1x (2018E) is the lowest since 2007.
"Cash generation has also significantly improved and our free cash flow forecast for 2020E is now 40% higher than 10 months ago. Operationally, the company now seems better positioned in more attractive end-markets with an improved, more streamlined organisational structure."
Analysts at Stifel took another look at Mitie after the group's recent share price weakness, and although their fundamental view of the company was unchanged, leading them to leave their price target on the group at 186p, they chose to up their stance on the facilities manager from 'hold' to 'buy'.
Stifel said Mitie's valuation was "difficult to ignore" and, despite its strategic transformation proving to be more difficult than expected and the challenging market backdrop, the analysts still viewed the group positively given its attempts to improve its proposition, tackle leverage head-on and deliver double-digit earnings.
Changing hands at 7.8 times' Stifel's estimates for the company earnings in 2019 and at an EV/EBITDA multiple of 5.9, the stock was trading at a greater than 20% discount versus the 10-year average for each of those metrics and at their cheapest since 2010.
The American broker also noted that Mitie's interim results in November could provide a near-term catalyst, with a greater drop-through of cost savings set to be "a key lever" for improving investor sentiment.
"We believe our 10x FY19E EPS valuation is a fair reflection of the opportunities and current market challenges, and undemanding for a business forecast to deliver a double-digit earnings CAGR on conservative forecasts," Stifel's analysts said.
While the analysts remained cautious on customer's willingness to pay for a wider technology offering, Stifel they still expected cash flow generation to become "increasingly attractive" after working capital normalises and the costs of change decline.