Broker tips: Admiral, Domino's Pizza, Cobham

JP Morgan Cazenove has upgraded Admiral to an 'overweight' recommendation to reflect the non-life insurer's strong growth potential recent share price weakness.

Identifying the recent share price as an "attractive entry point into what remains a best-in-class insurer", the broking arm of the bank increased its December target price to 2,100p from the previous 1,900p.

Results from Admiral on Wednesday showed good underlying performance, Caz analysts felt, with strong 11% growth in UK motor customers and 16% for turnover.

The solvency ratio at 212% was also ahead of their expectations, particularly given the hit taken by rivals from the government's changes to the 'Ogden' rate that personal injury claims are discounted.

This is well in excess of the 125-150% target range and potential improvement is expected, including from a possible Ogden review later in the year.

"In our view this again raises the prospect of additional capital return beyond the ~6% yield from ‘ordinary special’ dividends."

Acknowledging that on a headline basis the valuation remains high versus peers, Admiral's premium is seen as warranted "given the currently loss making international businesses and long term track record".

Domino's Pizza

Credit Suisse cut its target price on shares of Domino's Pizza to account for lower than expected growth in like-for-like sales in the UK and after the company decided to take control of its Scandinavian associates earlier than planned.

Thus, while the pizza-maker's fiscal year 2016 results were in-line, softer current trends were now in focus, analysts Tim Ramskill, Julia Pennington and Giulio Pescatore said.

LFL sales in Britain were ahead by 4.9% in the fourth quarter of 2016, below Credit Suisse's estimate for a rise of 6.3%.

Furthermore, over the nine weeks year-to-date UK LFLs were running at just 1.5%, albeit with a 240 basis point headwind from store splits.

In Scandinavia, the Norway business had bought the number three player and Domino's had moved to take a controlling interest in its Nordic associates sooner than expected.

Combined, those two changes led Credit Suisse to pare its earnings per share estimate for 2017 by 7%, bringing it in-line with the analyst consensus.

The broker also lowered its medium-term assumption for the rate of growth in LFLs from 5% to 4% noting that the impact from more splits should be lapped within the year.

"The clear focus is likely to be on LFL growth with the next update not due until the interim results in late July."

Following on from all of the above, the target was cut from 475p to 455p but the recommendation was kept at 'underperform'.

Cobham

UBS upgraded its recommendation on shares of Cobham from 'neutral' to 'buy', hailing management's decision to address its excessively high gearing through a rights issue and 'self-help' initiatives as the "beginning of the turn-around".

The company's efforts were expected to lower net debt as a percentage of operating profits (EBITDA) down to a "more comfortable" level of 1.8 times.

Furthermore, analyst Cristian Nedelcu believed markets were underestimating Cobham's ability to improve its margins.

He estimated markets were pricing-in about 100 basis points of margin increases over the medium-term, whereas Nedelcu saw scope for 400 basis points worth of improvement which would take them to 15.5%.

As a result, starting with 2019 UBS revised its estimates for earnings before interest and taxes up by between 3.5% and 5.5% a year and for free cash flow by 18% per annum.

"We see ample room for FCF improvement going forward driven by: improvement in profitability, the non-repeat of cash outflows related to past provisions, lower restructuring cash charges as well as cash release from working capital and a normalisation of capex investments," he said.

Nedelcu raised his target price from 120p to 155p.