Broker tips: Mediclinic, Provident Financial, Reckitt Benckiser
Investec downgraded Mediclinic's London-listed shares despite having a more positive view than management on the outlook for the company's business in the United Arab Emirates, in anticipation of a weakening in the South Africa rand.
In an update post the company's results for fiscal year 2017, the broker lowered its estimates for Mediclinic's sales in the UAE in fiscal year 2018 and for all of the regions in which it operated, especially the UAE and SA, in fiscal year 2019.
Management was right to adopt a cautious stance on the UAE business despite recent positive regulatory changes, analyst Cora Mccallum said, pointing to successive profit warnings, although she believed there was now room for upgrades on that front.
Nevertheless, she also cut her earnings per share forecasts for the company in fiscal years 2018 and 2019 by 16% and 19%, respectively, due to her broker's expectations for that African currency.
In local currency, the analyst marked down her estimates for the company's earnings before interest, taxes, depreciation and amortisation in South Africa for 2018 and 2019 by -5% and -6%, in Switzerland by -3% and -8% and in the UAE by -20% and -21%.
RBC Capital Markets cut its stance on Provident Financial to 'sector perform' from 'outperform' and slashed the price target to 2,650p from 3,400p following the subprime lender's warning over its consumer credit division last week, which sent the shares sharply lower.
"Provident’s profit warning came 11 weeks after its Capital Markets Day and just over five weeks after its Q1/17 IMS. As such, we view it as a self-inflicted wound for management and believe it will take (at least) several quarters for management to rebuild credibility and assure the market that its plans are working."
In addition, RBC said considerable execution risk remains, highlighting the fact that profit warnings are rarely a one-off event. It also said no material de-rating of the business has yet occurred and that impairments could come in above its expectations despite management noting there has been no change to underlying credit quality.
The bank cut its adjusted diluted earnings per share estimate for 2017 to 150.90p from 178.30p, for 2018 to 187.50p from 206.80p and for 2019 to 224.60p from 240.90p.
Analysts at Credit Suisse judged Reckitt Benckiser's acquisition of Mead Johnson to be well-timed, allowing it to make the most of cheap debt which meant the transaction would be immediately earnings accretive.
As a result, they boosted their earnings per shares estimates for the company over 2017 to 2019 by between 4% and 11%, which in turn led them to mark up their target price for the stock by 11% to 8,650p.
In particular, they pointed out how in the absence of that acquisition it would have been impossible for it to achieve its target for growth of 10% in earnings per share organically.
That was important given how its top management's key performance indicator was EPS growth, analyst Charlie Mills highlighted.
From a product standpoint, infant milk formula was an attractive category offering growth, strong branding and premiumisation, they added.