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The Expert View: Tullet, Rentokil, Sage Group and Burberry
by Harry Brooks on Nov 12, 2012 at 05:01
Our daily round-up of analyst recommendations and commentary, also featuring Capita.
Our daily round-up of analyst recommendations and commentary, featuring Rentokil, Sage Group, Burberry, Capita and Tullett Prebon.
Peel Hunt cuts target price on Tullett Prebon
Stuart Duncan, analyst at Peel Hunt, has cut his target price for inter-dealer broker Tullett Prebon (TLPR.L) on the back of a third-quarter update that reflected tough trading conditions.
In the four months to the end of October revenues hit £276 million, down 12% on a year ago. 'The statement highlights how difficult conditions have been across the sector as trading activity has remained muted, particularly against some tough comparatives from last year,' Duncan said.
However, although the analyst's target price falls from 400p to 360p, he reiterated his 'buy' recommendation, saying the shares still look cheap. 'Regardless of the short-term direction of trading, Tullett is not expensive having underperformed over the last 12 months.
'The shares are currently trading on a December 2012 enterprise value to earnings multiple of just 4.0x, or alternatively a price-to-earnings ratio of 6.7x.'
Shares in the group closed at 239.18p on Friday, down 22.82p or 8.71%.
Seymour Pierce downgrades Rentokil Initial
Caroline de La Soujeole, analyst at Seymour Pierce, has downgraded multifaceted services business Rentokil Initial (RTO.L) from 'hold' to 'reduce' following a disappointing trading update.
Once again, the group's courier business City Link is the source of pain. It lost £24 million in the first nine months of the year, and although Rentokil previously said it would break even in the last quarter it now expects the unit to lose £1 million-£2 million.
'City Link saw sales growth of 2.4% and a 19.1% reduction in operating loss,' de La Soujeole said. 'However, management are now guiding towards a small loss in 4Q12 due to a reduction in revenue per consignment as a result of adverse customer mix. In our view, management have little option now but to sell the business.'
De La Soujeole noted that it's not the first time Rentokil has failed to deliver its promises in relation to City Link. She has cut her 2012 earnings forecast by 9% following the update.
'On our new numbers, the shares are trading on a prospective price-to-earnings ratio of 11.6x FY12E which is too high in our view for a business reporting aneamic top line growth and given the ongoing issues at City Link.'
Shares in the group closed at 87.05p on Friday, down 1p or 1.14%.
Investec downgrades Sage Group to 'sell'
Julian Yates, analyst at Investec, has downgraded business software maker Sage Group (SGE.L) from 'hold' to 'sell' ahead of December's preliminary results, saying the shares have become too pricey.
Yates said he continues to see near term sales growth as muted as a result of the chilly macroeconomic climate and the ongoing shift in enterprise software from the licence model to subscriptions.
The company's plan to expand growth areas and use its strong cash pile to enhance returns is the right one, Yates said, but he said it'd take a long time to implement given Sage's diverse product range.
'Almost 20% of sales are non-core or in product wind-down mode creating a top line headwind on top of the macro challenges. This places significant reliance on the growth hot-spots, which are still a minority of sales,' he added.
Shares in the group closed at 307.4p on Friday, down 2.9p or 0.93%.
Berenberg Bank lifts target price for Burberry
John Guy, analyst at Berenberg Bank, has increased his target price for upmarket fashion retailer Burberry (BBY.L) on the back of interim results that beat expectations.
In the six months to the end of September pre-tax profits rose 6% year-on-year to £173.4 million, just over 2% ahead of consensus expectations. The interim dividend was lifted 14% to 8p.
Guy noted that the retail/wholesale gross margin exceeded expectations, up 250 basis points year-on-year to 69.2% as a result of price increases, foreign exchange gains on procurement and increased retail sales.
Burberry's recent decision to bring its beauty arm in house is a good one, Guy said, and he expects it to make a positive earnings contribution by 2015.
The analyst's target price rises from £13 to £14, and he reiterated his 'buy' recommendation.
Shares in the group closed at £12.19 on Friday, up 5p or 0.41%.
Shore Capital says 'sell' Capita
Robin Speakman, analyst at Shore Capital, has reiterated his 'sell' recommendation on Capita (CPI.L) ahead of next week's trading update, reminding investors that the outsourcing firm lowered its revenue guidance in third-quarter updates in both 2010 and 2011.
Although the analyst said the trading environment has softened recently and its win rate has improved, Speakman said rising revenues are still a result of acquisitions rather than organic growth.
He also noted that as the next election nears Capita may suffer: 'The contract environment is improving to our eyes, but we note that in c15 months time the public sector environment is set to tighten again as the next parliamentary election cycle gears up.
'Our principal concern lies in Capita’s margin development profile and in working capital requirements for future development. We believe that both of these may see negative development weighing on our forecasts; earnings upgrades appear a way off yet in our view.'
Shares in the group closed at 724p on Friday, up 1.5p or 0.21%.