Broker tips: Sage, Dixons Carphone, Hollywood Bowl, Ocado
A day after being downgraded by Barclays, software company Sage was lifted to 'hold' from 'sell' at Deutsche Bank, which highlighted the valuation and potential for private equity interest.
Deutsche noted that the shares have fallen 16% over the past two months and now trade at 16x the bank's FY19 earnings per share estimates, which is the low end of its five-year valuation range.
"While competition is rising, we believe Sage has a relatively sticky, defensible product set and forecast mid-single percentage EPS compound annual growth rate over the next three years, along with a 3% yield.
"We continue to think circa 16x FY19 EPS is reasonable, which yields our target price of 540p, only slightly below the current price, hence the upgrade."
The bank also pointed to news this week of private equity firm KKR's $2.6bn takeover bid for Australian accounting software company MYOB. It said it was surprised that Sage shares did not react positively to news of private equity interest in the more mature players in the sector.
Ahead of a strategy update two months away, Dixons Carphone shares do not reflect enough optimism about the potential for new management to improve performance and dividends, said HSBC as it upgraded to 'buy' from 'hold'.
Having a deep dive into Dixons Carphone six months after the appointment of chief executive Alex Baldock, HSBC was impressed with his performance so far and with the implications of the new bonus structure, which is tied to free cash flow rather than earnings per share.
The group’s cash generation has been disappointing in recent years but the bank said the top end of management’s new bonus targets points to three-year cumulative cash flow that would be equivalent to more than a third of the current market capitalisation.
“Dixons Carphone is a strong market leader with a well advanced multichannel platform and right-sized property portfolio. This arguably makes it lower risk than many stocks in the sector," the analysts wrote.
Baldock is scheduled to provide a strategy update in December, with the analysts expecting him to either reveal plans to fix Carphone's position in mobile phone retailing or exit this section of the market, neither of which should be a disaster. In fact, the analysts expect the strategy update in December to be "positive" overall.
Analysts at Shore Capital took a fresh look at "exceptionally well-run" ten-pin bowling outfit Hollywood Bowl on Wednesday, reiterating their 'buy' recommendation for the shares following the company's post-close update.
In the wake of the group's 5.8% revenue growth throughout the year, despite the affects of both the strong winter and summer weather seen across the UK, the World Cup and the "general malaise on the high street", the broker applauded Hollywood Bowl for its robust business model and its management team's excellent execution, including its dynamic pricing model.
Looking ahead, Shore Capital saw Hollywood Bowl as being set to benefit from two new openings at Watford and Lakeside, along with softer comparatives, leading the broker to retain full-year pre-tax estimates of £24.8m, or 13p per share.
With net debt of roughly £5m, implying a free cash balance of around £17m, Shore Capital also expected Hollywood Bowl's total dividend for the year to come to approximately 9.7p - yielding a dividend payout somewhere in the ballpark of 5%.
Shore Capital's research analyst Greg Johnson, said: "We continue to view Hollywood Bowl as an exceptionally well-run business in an attractive sub-sector of the leisure market. Our cash flow based fair value remains at c240p/share although we see scope to raise this over the medium term. The recent weakness in the share price appears unwarranted."
The broker also reiterated its 200p target price on Hollywood Bowl.
Barclays upgraded Ocado on Wednesday after the online grocery specialist's valuation retreated to a more "reasonable" level.
In early August Barclays downgraded the stock to 'underweight' as analysts felt the near-1,100p shares had overshot "likely reality".
With the share price having fallen below 800p on little newsflow, the analysts moved their rating back up to 'equal weight', with the price target of 875p unchanged.
Summing up the investment case, Barclays noted that Ocado has signed up four "very credible" retailers as customers for its Ocado Smart Platform – Casino of France, Sobeys in Canada, ICA in the Nordics and Kroger in the USA.
"Given the undoubted growth of online grocery across many markets internationally, Ocado may be well positioned to sell its technology to grocers who want to make the move online. Although working with Ocado involves paying significant fees, it might also be seen as a ‘best-in-class’ solution and appear to be a lower risk option than ‘going it alone’."
Concerns for analysts are gauging the true size of Ocado’s potential market and the risk from the practical challenges that will come from building tens of facilities internationally.