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The Expert View: Morrisons, Vodafone and Debenhams
Our daily roundup of analyst commentary on shares, also including Diageo and Merlin.
by Michelle McGagh on Jan 13, 2016 at 05:00
Morrisons at a turning point
It was a merry Christmas for Morrisons (MRW) after trading over the festive period helped the supermarket to its first positive like-for-like quarter in four years.
Jefferies analyst James Grzinic retained his ‘buy’ recommendation and target price of 210p on the shares, which jumped 9.4% to 166.6p yesterday.
‘Morrisons reported its first positive like-for-like in four years, with a +0.2% Q4 beating consensus of -2%,’ he said. ‘Profit expectations for the year have been maintained, but strong working capital and disposals progress means that net debt guidance has been lowered by potentially more than £175 million.
‘Expect a short squeeze as confidence grows on the deliverability of mid-term financials.’
Grzinic added that the senior team was now in place and the ‘capital structure [was] in a very different place relative to peers, and the trading platform [was] benefiting from sharper pricing and a better executed store estate’.
‘The group appears in great shape to deliver from here,’ he said. ‘There are reasons to look at 2016 with greater confidence as: the group cements its pricing authority; the negative impact of dropping vouchers subsides; Morrisons starts to move on the front foot in terms of trading its vertical integration unique selling proposition more effectively.’
‘Low risk’ Debenhams upgraded
High street department store Debenhams (DEB) has been upgraded after reporting ‘solid numbers’.
Liberum analyst Tom Gadsby upgraded his recommendation from ‘sell’ to ‘hold’ with a target price of 73p. The shares surged 15.2% to 76.1p yesterday.
‘Debenhams has reported solid trading numbers against a soft comparison base of -0.8% for the equivalent 19-week period last year,’ he said.
‘Debenhams has reiterated its guidance given at the time of the full-year results in October that full-year gross margins would be between flat and 0.5%, and has repeated that guidance. Debenhams looks to have been better positioned than some of its peers with regards to the weather, and had a reduced range of stock in weather-sensitive categories, but avoided having stock levels so low that it impacted sales through poor availability, which hurt both M&S and Next.’
Gadsby added that the shares yield a ‘healthy return’ of 5.3%, ‘which is supported by 2.2x earnings cover and 2.1x free cashflow cover.
‘While we see no more than low single digit earnings growth over the next few years for Debenhams we note that the company has consistently stuck with a minimum dividend cover of 2.2x for the past five years through more challenging conditions for the retail sector.
‘We believe that there is very low risk to the dividend and acknowledge its attraction to investors,’ he said.
Diageo: H1 results will not show ‘recovery’ analysts want
Beverage company Diageo (DGE) is unlikely to deliver the ‘recovery results’ that are needed.
Berenberg analyst Javier Gonzalez Lastra retained his ‘buy’ recommendation and target price of £23.50 on the shares, which rose 2% to £18.41 yesterday.
‘Diageo’s results, which are due on Thursday 28 January, are unlikely to be the recovery set of results we had hoped for,’ he said.
‘Diageo has already prepared analysts and investors for it. A move to a replenishment innovation model will affect H1 shipment figures in the key US market, with shipments likely to be down by 2%. Overall, for the group, we are looking for organic sales growth of 1.9% in H1, organic operating profit growth of 1.1% and earnings per share of 51.6p.’
Gonazalez Lastra said he continued ‘to be attracted to Diageo’s valuation discount to peers’ despite the anticipated first-half results.
‘This discount can only be sustained if Diageo’s long-term growth profit is significantly weaker than its peer group but… we do not believe this to be the case,’ he said.
Merlin Entertainment downgraded after share price rises
Alton Towers owner Merlin Entertainment (MERL) has been downgraded after share outperformance, and there are still concerns about a recovery following last year’s rollercoaster accident.
Shore Capital analyst Martin Brown downgraded his recommendation from ‘buy’ to ‘hold’ and does not have a target price for the stock. The shares inched 4p higher to 441.7p yesterday.
‘We remain firm believers in the long-term growth story at Merlin, however the shares performed strongly in Q4, with relative outperformance to the market of over 24% in the last three months, 14% over six months, and over the last 12 months it is c.24% ahead. All of which means on a relative basis, it has outperformed since the day before the Alton Towers accident,’ he said.
‘While we ultimately believe that trading at Alton Towers will recover, we expect that to occur in 2017 at the earliest. Recent reports that Alton Towers is going to be open for fewer days this year would suggest that management continue to believe the recovery will take time. Although we suspect management will take the opportunity to use this downtime to invest in the estate and a number of rides.’
Prospects for Vodafone ‘bewitching’
There are ‘bewitching prospects ahead’ for telecommunication giant Vodafone (VOD) thanks to higher margins and lower capital spend.
Deutsche Banka analyst Robert Grindle retained his ‘buy’ recommendation and target price of 280p. The shares rose half a penny to 221.3p yesterday.
‘We draw comfort from Vodafone’s mobile traffic and pricing trends…the rate of unit revenue decline appears set to improve while volumes remain robust and the cost of adding additional capacity is already low enough to support materially lower capital intensity,’ he said.
‘While – as always – much depends on competitor rationality, the prospect of improving growth and higher margins, combined with lower capex, is a bewitching prospect for Vodafone. Further sterling weakening would also support our “Vodafone as top telco pick for 2016” view, though heading growth in Q3 is not as strong as underlying.’
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Look up the shares
- WM Morrison Supermarkets PLC (MRW.L)
- Debenhams PLC (DEB.L)
- Merlin Entertainments PLC (MERL.L)
- Diageo PLC (DGE.L)
- Vodafone Group PLC (VOD.L)