Broker tips: Betfair, Tesco, Sainsbury, Morrison, BAT, Imperial Tobacco
Numis raised its rating on Betfair to ‘reduce’ from ‘sell’ and reiterated its 2,100p price target, in light of the modest recent retreat in the share price.
Commenting on the company’s full-year results, it noted that revenue was just a touch ahead of its expectations, with earnings before interest, tax, depreciation and amortisation and EPS in line.
Numis also said the results highlight management’s focus on competition.
“We believe that Betfair is an excellent operator in a highly competitive market but that the valuation may have lost sight of quite how competitive,” said Numis.
It pointed out that the shares are trading on 35.5x 2016 earnings estimates, which despite the excellent dynamics of the business is too high.
Credit Suisse initiated coverage of UK food retailers with a negative stance on the sector, saying it sees few opportunities within a group that has historically misallocated capital, is faced with extreme competitive pressures and operates in a low-growth environment.
The bank started Tesco and Sainsbury at ‘underperform’ with price targets of 169p and 219p, respectively. It initiated coverage of Wm Morrison at ‘neutral’ with a 176p price target.
It said like-for-like sales continue to be negative at all three companies, but margins are declining even faster. “We see no obvious path back to recent margin levels,” said CS, adding that Morrison is relatively better positioned is due to its more homogeneous store estate, higher freehold levels and opportunities to resolve its internal issues.
It said that Tesco and Morrison have borne the brunt of rising competition. “New CEOs have carte blanche to enact changes, but both are faced with a multitude of internal issues as well as a difficult trading environment,” noted CS.
Goldman Sachs has upgraded British American Tobacco to ‘neutral’ from ‘sell’ and raised the target price to 3,270p from 3,010p.
It noted that since being added to the 'sell' list on 9 October 2014, the shares are down 2% versus the FTSE World Europe’s rise of 7% and the staples sector up 11%.
GS said it continues to believe that 2015 will be a challenging year for BAT as transactional currency headwinds erode earnings.
“However, accounting for the earnings accretion from BAT’s stake in Reynolds, and the shares’ 13% underperformance versus staples, we believe that its current valuation adequately reflects its future growth prospects.”
It said the shares trade on a 2016 price-to-earnings ratio of 14.3x, which is a 25% discount to staples, and offer a 7.9% free cash flow yield, versus staples’ 5.3%.
Risks to Goldman’s view and price target include a better/worse-than-expected pricing environment in tobacco, currency fluctuations, higher/lower-than-expected movements in interest rates, and macro changes.
Goldman also took a look at Imperial Tobacco, reinstating the stock as a ‘buy’ and adding it to its Conviction List, with a 12-month price target of 3,765p.
It said Imperial offers attractive value, trading on a price-to-earnings ratio of 13x 2016.
“There is room for further upside to our estimates and price target if management is able to stabilize market share in the US, and we do not rule out Imperial being a target for further consolidation activity in tobacco,” said GS.