Broker tips: Playtech, Glencore, Burberry
Morgan Stanley downgraded its stance on Playtech to 'equal-weight' from 'overweight' on Tuesday and slashed the price target to 650p from 1,100p after the gambling software company's profit warning a day earlier on the back of weakness in Asia.
Playtech said on Monday that the current run rate in Asia is "materially" below the average in the second half of last year and what was expected for the second half of 2018 at the start of the year. If it remains unchanged for the rest of the year, including no material improvement in Malaysia, the group expects revenue from Asia to be around €70m lower than original expectations.
As a result of the warning, MS cut its earnings per share forecasts by 10% for this year and 31% next year and said its confidence in earnings visibility has reduced.
"While we had flagged Asian risk in the past, we had always assumed this was likely (as in Malaysia) to be a governmental/regulatory issue, and saw the risks as balanced between a long-term trend towards regulation of grey markets and shorter-term political risk.
"Unexpectedly in China, the issue appears to be competitive, where competitors (new and existing) are forcing take rates down in an 'aggressive pricing environment'."
MS said that while Playtech may be able to mitigate this by offering more structured agreements - better pricing in return for guarantees over position or volumes - it suggests that the company's product in Asia may be less compelling than previously assumed, with lower barriers to entry or unsustainably high margins.
"Although the risk-reward skews to the upside, we see our bear case as a reasonable scenario and think the share price is unlikely to reflect the stock's attractive qualities (cash flow, core business strength, balance sheet optionality) in the next year, just as it has not done for some time."
Analysts at RBC Capital said on Tuesday that after being issued a subpoena from the US Department of Justice regarding more than a decade's worth of business practices, the investment case surrounding mining giant Glencore was more uncertain than it had been beforehand.
Glencore was hit on Tuesday with a subpoena from the DoJ which requested it produce documents and other records related to its activities in Nigeria, the Democratic Republic of the Congo and Venezuela dating from 2007 to present.
"The subpoena drives more uncertainty into the Glencore investment case, which we find compelling from a valuation perspective, but increasingly challenged from a headline risk perspective," RBC said.
While the Canadian broker noted there was not enough detail in the release to understand exactly what the investigation was centred on, given that it covered multiple countries, it would indicate that there was a "relatively thorough investigation" taking place.
Investigations under the banner of the Foreign Corrupt Practices Act generally result in sanctions, fines and penalties of up to $25m or twice the gain or loss caused by the violation and imprisonment for up to 5 years for each breach.
"After navigating the recent challenges in the Congo, albeit with a jurisdictional shift in risk from the Congo to the US, this investigation is likely to provide another reason for investors to proceed with caution around the Glencore investment case," said RBC's analysts.
"We would expect that Glencore will use all legal means to defend itself and would highlight that there are no formal charges at this stage."
RBC stuck to its 'outperform' recommendation and 410p target price on the stock.
Analysts at Redburn are "cynical" over Burberry’s strategy to achieve a greater fashion mix and higher luxury positioning, classifying the fashion designer as a "risky business" and reiterating their 'sell' recommendation for the firm's shares.
In a research note sent to clients, the broker questioned the potency and strength of the Burberry brand due to its "sluggish" share progression and pointed out the mixed track record of Burberry’s leather goods.
The broker also cites the group’s low sales productivity as driving inferior productivity.
Finally, Redburn disagreed with the fashion designer that it would see any positive impact from the turnaround of Gucci, which saw sales improve in all regions and categories in 2017.
"This is all sat on a 27x multiple, usefully above its history indicating that the market has already baked in full delivery on strategy. We are not so sure, and our outer year forecasts sit below the company's ambitions," said Redburn’s note.