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The Expert View: Debenhams, Premier Foods and EasyJet
by Harry Brooks on Nov 21, 2012 at 05:01
Our daily round-up of analyst recommendations and commentary, also featuring Homeserve and IMI.
Our daily round-up of analyst recommendations and commentary, featuring Debenhams, Premier Foods, EasyJet, Homeserve and IMI.
Seymour Pierce downgrades Debenhams to 'reduce'
Kate Calvert, analyst at Seymour Pierce, has downgraded department store Debenhams (DEB.L) from 'hold' to 'reduce', warning that the shares have got ahead of the results.
Last month's full-year results showed a like-for-like rise in group sales of 1.6%, but Calvert noted that this was largely driven by online sales, and that UK operating profits fell 3.2%.
'We do not believe that Debenhams’ recent results and outlook supports the 111% share price rally since September 2011,' the analyst said. 'We expect UK profitability to remain under pressure as Debenhams has limited space growth over the next 18 months and the Oxford Street refurbishment costs to carry.'
Although Calvert said the recent reduction in the valuation gap with M&S was justified, she believes the rerating has now been overdone. 'Management’s medium term targets on new space, on-line and International are already assumed in consensus,' she added.
Shares in the group closed at 115.95p on Tuesday, up 0.45p or 0.39%.
Shore Capital warns of uphill struggle as Premier Foods cuts 900 jobs
Clive Black, analyst at Shore Capital, has applauded 'decisive action' at Premier Foods (PFD.L) to rationalise its bread-making operations, while sympathising with the 900 employees who have lost their jobs.
The Hovis owner is set to close two bakeries as part of plans to revitalise its troubled bread business. Birmingham will bear the brunt of the job losses, with 511 jobs going when a factory and distribution facility close their doors.
Black applauded the decision as a necessary move. 'Management is progressively reversing the failed strategy of times gone by, cutting debt, introducing focus and streamlining operations,' he said. 'Capacity reduction in plant bread will be welcomed by all participants in the trade and in Premier's case provides for margin expansion in due course.'
However, he said the 'struggle is still uphill', and he retains his 'hold' recommendation. 'Premier operates still within tough markets, where volume growth is hard to find. The Group also remains burdened by debt albeit is no longer looking over its shoulders from a financing perspective with the time that recent disposals have brought it, and it is encumbered by enormous pension liabilities.'
Shares in the group closed at 94.75p on Tuesday, up 2.5p or 2.71%.
Investec increases EasyJet's target price on dividend rise
James Hollins, analyst at Investec, has lifted his target price for no-frills airline EasyJet (EZJ.L) on the back of a solid set of annual results and the promise of bigger dividends to come.
Yesterday's results for the year to the end of September showed revenues up 12% year-on-year to £3.85 billion and pre-tax profits up 28% to ££317 million, at the upper end of Hollins' £310 million-£320 million estimate.
The analyst said the first key takeaway from the results was the indication of a permanent rise in the dividend policy, with the board proposing a rise from 10.5p to 21.5p for the year.
Second up, Hollins said although it was mindful of the risks of the situation in the eurozone, the update expressed 'a sufficiently positive view on both pricing and the ability to fill expanded capacity to suggest that our previous FY13E forecasts were too cautious'.
As such his target price rises from 690p to 740p, and he reiterated his 'buy' recommendation.
Shares in the group closed at 688.76p on Tuesday, up 36.26p or 5.56%.
Peel Hunt says 'sell' Homeserve despite forecast-beating results
Henry Carver, analyst at Peel Hunt, has increased his target price for emergency home repair firm Homeserve (HSV.L) following results that beat his forecasts, but he reitered his 'sell' recommendation, saying the shares are 'significantly overvalued'.
First-half adjusted pre-tax profit came in at £25.6 million, beating Carver's £24 million estimate, an estimate the analyst said was in line with the consensus. His target price rises from 130p to 170p.
However, Carver said the group continues to face execution risks at home and he expects growing the US operation to prove tricky. 'We maintain that in order for the US business to follow a similar success story to the old UK business (as many are modelling for) then much larger partnerships need to be made,' he said.
'The doubling of marketing spend in the US looks to be a necessary step, but in our view it is a make or break move.'
In the UK, the analyst warned that sorting out its marketing won't be easy, and an ongoing FSA investigation is also a worry. 'We note there is no provision for any fine from the FSA. This could be a substantial sum and potentially put the dividend under pressure,' he concluded.
Shares in the group closed at 247.92p on Tuesday, up 24.92p or 11.18%.
Berenberg Bank raises target price for IMI
Alexander Virgo, analyst at Berenberg Bank, has edged up his target price for control valve maker IMI (IMI.L) having attended a capital markets day.
IMI's interim management statement indicated lower growth expectations but higher margins, and Virgo sees this as a net positive, resulting in a 1% upgrade to his 2013/2014 earnings per share (EPS) forecast.
'Following a detailed Capital Markets Day we review the implications of IMI’s focus on high margin, high growth niche industry positions. We conclude that its EPS could be about 130p/share by 2017E, implying a share price of about 1,815p (14x price to earnings).'
The analyst said the shift to higher margin business should encourage investors. 'As margins prove sustainable, valuation should improve. We reiterate our buy recommendation, while our price target moves up slightly to 1,135p [previously 1,130p].'
Shares in the group closed at 991.19p on Tuesday, up 2.19p or 0.22%.