Broker tips: AB Foods, Britvic, Purplebricks

Associated British Foods shares fell on Tuesday as Numis downgraded its rating on the stock to ‘hold’ from ‘add’ and cut its target price to 2,942p from 3,016p following a trading update from the Primark owner.

The company on Monday said it predicted full year earnings to be slightly ahead of last year's, although like-for-sales at Primark are expected to have deteriorated and news of a sizeable pension deficit set off alarm bells with investors.

A previous small pension surplus has in recent weeks morphed into a £200m pension deficit after the marked decline in UK long-term bond yields post the Brexit vote, which the company said would result in an increased service cost and a higher interest charge next year.

Apart from this scare, the 53 weeks to 17 September were mostly rosy for AB Foods, which also announced the sale of its cane sugar business in southern China for an unnamed amount.

Operating profits will now be ahead of last year after exceeding management expectations in the second half of the year, helping alongside lift earnings per share "marginally" ahead of last year.

Like-for-like sales at fast-fashion retail arm Primark are expected to be down 2%, decelerating from the 1% decline in the first half of the year.

Numis said: “This update is largely favourable, echoing many remarks in that of 7 July. Fresh news is that full year 2015/16 will be a 53 week period and that agreement has been reached to divest the cane sugar business in southern China for an undisclosed price.”

The broker expects full year 2016 pre-tax profit of £1.076bn, down from a previous estimate of £1.128bn, taking into account the 53rd week and factoring in the update on the sugar and Primark businesses. Pre-tax profit in 2015 was 1.024bn.

Jefferies initiated coverage of Britvic at ‘hold’ with a 650p price target.

The bank said that over the medium term, its see a robust earnings outlook driven by benefits from the Business Capability efficiency programme on both Britvic’s top and bottom line.

“From full-year 2018 onwards, there is potential for positive earnings momentum as the benefits from cost cutting are realised and tailwinds from favourable financial items from FY17 debt refinancing as well as a lower effective tax rate, given downward pressure on the GB corporation tax,” it said.

However, in the near term, it reckons the shares lack catalysts, with FY17 a year of transition given ongoing high capex levels and limited scope for positive earnings momentum.

“We believe that the potential negative impact of the Brexit vote on underlying consumption of GB soft drinks could be overdone. However, the company faces some uncertainty around the impact of the sugar tax into 2018 as well as input cost headwinds from GBP weakness.”

Following the UK’s vote to leave the European Union, the shares have de-rated by around 10%.

“With limited potential for a re-rating until there is better visibility on the impact of the sugar tax, the macro impact from Brexit and rising input costs from GBP weakness, we initiate with a ‘hold’.

Jefferies added that any volatility in the share price could offer an attractive entry point for longer-term investors.

Purplebricks got a boost on Tuesday as Citigroup initiated coverage of the stock at ‘buy’ with a 200p price target.

Citi said the company recently reported maiden full-year results, delivering around 450% revenue growth, albeit from a low base.

The bank expects Purplebricks to deliver strong year-on-year revenue growth of about 136% to full-year 2017, turning profitable in full-year 2018.

It said that while the majority of home buyers start their property search online, the online agency space had grown relatively slowly until the Purplebricks’ business model was established in 2014.

It pointed out that in full-year 2016, the group’s growing network of local property experts (LPE) helped the business facilitate around 60% of all online UK residential transactions, and increase total market share to about 1.2% from 0.4% in 2015.

“We expect the group to build on this strength and continue to expand the LPE network, helping drive share to 2.8% by FY17E and 4.1% in FY18E.

“The business offers a number of add-on services, largely through partnerships, which we expect to help drive revenue per transaction going forward.”

Citi also highlighted the fact the company recently established operations in Australia and is expanding the lettings offer.

“These offer the group long-term growth potential as the operations leverage technology and its asset-light business model into new verticals providing scope for significant long-term upside.”

Citi also initiated Softcat at ‘buy’, with a 410p price target, saying it expects the company to sustain strong organic growth and forecasts a 9.3% earnings per share compound annual growth rate over the next three years.

“Excess cash, growing earnings, strong cash conversion and a strategic focus on organic growth are ingredients for cash returns to shareholders,” the bank said, adding that it sees the opportunity for 20p to 40p in special dividends by FY17e without raising debt.