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The Expert View: Morrisons, RBS and InterContinental
by Daniel Grote on May 06, 2014 at 05:01
Our daily roundup of the best analyst commentary on shares, also including Imperial Tobacco and Redhall.
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Price-cutting Morrisons could alienate customers and staff
Analysts at Barclays are way of the risks presented by Morrisons’ (MRW.L) price-cutting strategy, warning that both customers and staff could be left in the cold by its plans.
The supermarket group announced last week that it would cut prices on 1,200 own-label and branded products by an average of 17%. It also plans to cut the number of products on offer by around 20% over the next three years and make £1 billion of cost savings over the same period, split evenly between reductions in its operating costs and through better buying and promotions.
‘The plan is in many ways very sensible – but it is far from risk-free,’ Barclays said. ‘We are especially wary of the dangers of cutting the range by 20% and of the planned £500 million cuts to the cost base,’ it said.
‘The former risks alienating customers and the latter risks alienating staff – both will reduce the differentiation between Morrisons’ offer and that of the discounters.’
Barclays has downgraded Morrisons from ‘equal weight’ to ‘underweight’ and cuts its target price from 210p to 180p. Shares on Friday were down 1.3p, or 0.7%, at 196.2p.
Don’t get too excited by RBS’s stellar results
Investec has urged investors not to get carried away by Royal Bank of Scotland’s (RBS.L) strong first quarter results which led to a surge in the share price of the taxpayer-owned bank.
RBS last week announced profits of £1.6 billion in the first three months of the year, almost double what it made in the same quarter last year. Shares rose 29p, or 9.5%, to 335.8p on the news.
Investec analyst Ian Gordon said the profits represented ‘welcome relief’ for after the government had blocked the bank’s plans to increase its bonus pool, but warned against over-excitement.
‘All is not quite so rosy – only £100 million of a £2 billion full year-2014 restructuring charge [was] taken in the first quarter and a £100 million loss in non-core [business] is a temporary aberration. Don’t get carried away!’ he said.
Gordon maintained his ‘hold’ recommendation and target price of 325p.
Jefferies won’t check in to InterContinental despite divi
InterContinental Hotels’ (IHG.L) announcement of a $750 million (£440 million) special dividend and strong results for the first quarter of the year have failed to sway analysts at Jefferies, who still rate the shares as expensive.
InterContinental on Friday announced a 6% jump in revenue per room for the first three months of the year, the highest level for nearly two years. Its proposed special dividend was meanwhile higher than investors had expected.
Shares surged by 8.4% on Friday on the news, rising to £21.94, but Jefferies analysts Ian Rennardson and Mark Irvine-Fortescue kept the company on an ‘underperform’ rating, with a target price of £16.50.
‘Trading is solid but in line with expectations, rooms growth remains subdued and the capital return is done, although the company says it is reviewing its opportunities for further assets disposals,’ they said. ‘We think the shares continue to look expensive.’
Delays and departures for Redhall force downgrade
FinnCap analyst David Buxton has downgraded Redhall Group (RHL.L) from ‘buy’ to ‘hold’ after the AIM-listed industrial engineering company reported a disappointing trading update.
Delays to orders in its manufacturing division and costs to be incurred from a review of contracts and restructuring of its finance team marred its update to the market. Redhall also announced the departure of finance director Chris Lewis-Jones.
‘This is a further disappointment and we anticipate that the shares will react negatively in the short term,’ said Buxton. ‘As a result we are for the time being moving our rating from “buy” to “hold”, with our price target reduced to 45p.' Shares on Friday were down 5p, or 10.7%, at 42p.
Rebound in margins on the cards at Imperial Tobacco
Panmure Gordon analysts are expecting an improvement in margins from Imperial Tobacco (IMT.L) when the cigarette giant reports its interim results this week.
After a weak margin performance in the first half of its 2013 financial year, Panmure analysts Damian McNeela and Graham Jones said a rebound in margins this time around should help to offset revenue declines.
‘The interims should also provide the company with an opportunity to update the progress of its restructuring and the potential initial public offering of its logistics business,’ they said.
‘We recognise that the operating environment, whilst still challenging, does seem to be improving for Imperial. However, given our concerns on organic growth we maintain our “hold” recommendation ahead of the results.’ Panmure has kept a target price of £25 on the shares, which on Friday were down 10p, or 0.4%, at £25.14.