Broker tips: AA, Whitbread, Animalcare
18-04-2018 16:15
The risk/reward for roadside assistance and breakdown cover provider and insurer AA is now balanced, according to Credit Suisse, which upped its rating on the stock to 'neutral' from 'underperform' and hiked the price target to 130p from 80p.
CS said the company's trading earnings before interest, tax, depreciation and amortisation guidance of between £335m and £345m is too low, which the bank forecasting £346m. In addition, it pointed to the fact that Standard & Poor's reiterated its debt rating and said this suggests AA will not default on its debt.
"This removes the risk around the ability to, and cost of, future refinancing," CS said.
In the longer-term, however, the bank continues to see structural headwinds and forecast personal membership numbers declining on the back of aggressive price competition and changing user demands.
On Tuesday, the AA reported an annual profit in line with depressed expectations after a boardroom bust-up caused it to drop out of the FTSE 250.
Trading earnings before interest, tax and other items fell 3% to £391m in the year to the end of January, in line with company guidance from September. As expected, it slashed its annual dividend to 5p a share from 9.3p a year earlier.
HSBC analysts downgraded Whitbread to 'hold', arguing the company's businesses are past their peak and have lost trading momentum.
The 10% rally in Whitbread's shares since 13 April has removed the company's deep discount and made the balance of risk and reward for investors more sensible, the analysts said. They reduced their rating to 'hold' from 'buy' and maintained their £48 price target, leaving room for a further 14% gain.
Whitbread's shares rose after Elliott Advisers emerged on 16 April as a holder of more than 5% of the shares, mainly through derivatives. The activist investor reportedly wants Whitbread to break itself up by demerging Costa, its coffee shop business, from Premier Inn, its budget hotel chain.
The HSBC analysts cast doubt on reports that a break-up could unlock £3bn of value for investors. There is only about £1bn of unrealised value in Premier Inn, they said in a note to clients on Wednesday.
After years of booming business, Costa faces fierce competition from direct rivals such as Starbucks and Caffe Nero, budget chains including Greggs and premium cafes in cities. Trading is weak and there are not enough cost savings in the business to cover investment and higher staff and commodity costs, the analysts said.
Premier Inn, Whitbread's biggest business, is a good asset but relies on a London market that is cooling and bulging with stiff competition, they added.
"With an uncertain UK macro outlook, persistent weakness in London and aggressive roll-out from its closest peer, Travelodge, we think [Premier Inn] is also past its peak market positioning," the analysts wrote. "We believe that the fundamentals of [Whitbread's] business have weakened and the trading momentum is negative."
Animalcare is facing competitive pressures across its current sales mix, but while analysts at Panmure Gordon made some slight revisions to revenue and margin projections, they see strong growth ahead.
Forecast changes included shifting a chunk of EBITDA for 2018 into 2019, but numbers still inferred that the company was "set on delivering double-digit EBITDA growth" over the next two years on its enlarged pan-European platform.
Animalcare released a trading update on Wednesday morning ahead of its preliminary results in May that told investors to expect an estimated 9.5% year-on-year increase in revenues to £91.9m, slightly ahead of both the company and the broker's estimates, with earnings "broadly" in line with management expectations.
In terms of next year, the AIM-quoted group warned that a combination of its sales mix and competitive pressures were expected to negatively impact margins, despite earnings being significantly ahead of the prior year.
This made Panmure analyst Mike Mitchell quite keen to see Animalcare's May prelims to garner "further detail and granularity".
But in terms of his immediate view on numbers, Mitchell forecasts for the 2017-2019 period saw expectations revised upwards for reported total revenues in 2018 to £98.5m from £97.3m but he took a more conservative view on margins.
Still, with a new target price of 365p, a 15% discount to its peer-group derived target price of 429p, the shares remained a 'buy'.
