Broker tips: Dixons Carphone, Royal Mail, Entertainment One
Credit Suisse transferred coverage on consumer electronics retailer Dixons Carphone to a new analyst on Tuesday.
Simon Irwin, Credit Suisse's new go-to man on Dixons, assumed a 'neutral' stance on the company, stating that despite the high-street firm's "kitchen-sinked" guidance, he believed that risks were still weighted to the downside.
The Credit Suisse analyst pointed out there was "rarely any rush" to buy into retail restructuring stories and that Dixons did not appear to be an exception to that rule.
"There are no further 'magic bullets' from competitor exits and a fully developed new UK strategy is presumably reliant on completion of the mobile network renegotiations, where there is no guarantee of a successful outcome," warned Irwin.
With Dixons' mobile unit remaining barely profitable, the analyst assumed that further downsizing beyond the previously announced shuttering of 92 Carphone Warehouse stores was probable.
"The strategy (for now) is primarily based on better execution and while there are always opportunities for improvement, which can be meaningful in a low margin business, it doesn't feel as through service levels in either Dixons or CPW are so bad that there are easy low hanging fruit," he said.
The analyst left forecasts for Dixons's current trading year largely unchanged, with the broker's target price unmoved at 190p, but slowed its estimates for a recovery in EPS in future years.
Analysts at RBC Capital upgraded their recommendation on shares of Royal Mail, pointing to their valuation and their improved risk/reward profile to back-up their case.
On the Canadian broker's estimates, the shares were offering a compound annual growth rate in earnings per share of -1% over 2018-20 (on a 'super adjusted' IAS 19 basis), but a dividend yield of 5.1%.
True, with fiscal year-end 2018 net debt-to-EBITDA at 2.3, versus 2.1 for the prior fiscal year, and given the company's investment in change, RBC saw scant scope for DPS upside or for "surprises" on capital returns.
There were also the stakeholder/union issues to contend with, RBC said.
However, with the share price having come off, the risk/reward trade-off had changed.
Hence, their decision to revise their recommendation on the stock up from 'underperform' to 'sector perform', albeit with an unchanged target price of 500p.
"Our unchanged PT implies a 5% DPS yield and ~13x YA PER – in line with more traditional mail/parcel focused European postal peers, and supporting our new SP rating."
Peppa Pig has become a global brand, reinforcing the appeal of the character’s owners Entertainment One, JP Morgan analysts said.
Merlin Entertainments' announcement that it would open as many as 50 Peppa theme parks underlines the durability of the cartoon pig’s appeal, JP Morgan said. The analysts retained their ‘overweight’ rating on Entertainment One shares and increased their target price to 546p from 423p.
The parks will add up to £17m of earnings for Entertainment One in direct licensing fees and will also increase brand recognition and drive merchandising sales, the analysts said.
The company books revenues from licensing for products such as toys and DVDs featuring Peppa and other characters in its family division.
While Peppa continues to thrive and extend her international reach other shows such as PJ Masks are doing well, meaning Entertainment One is likely to beat its target of doubling merchandise revenues by 2020, JP Morgan said.
"The opportunity in family appears significant," JP Morgan said. "The rollout of the family operations continues to perform particularly well in markets like the US and China."
Entertainment One could also be an acquisition target after attracting a takeover proposal from ITV in 2016, the analysts said.