Broker tips: Capita, Ocado, CMC Markets

Analysts at Jefferies upgraded their recommendation on shares of Capita citing evidence of change under its chairman, despite the lack of a chief executive officer.

"Recent events at Serco and MITIE suggest that a new CEO could remove significant cost if organisational complexity is reduced - Capita has a reputation for running operating units on a stand-alone basis so there may be considerable duplication," analysts Kean Marden and Will Kirkness said in a reserch note sent to clients.

In their opinion, equity markets appeared willing to back management turnarounds at a very early stage.

Linked to the above, while a UK in perpetual political turmoil meant trading would remain difficult, lowly valuation multiples meant scope for self-help was "underappreciated".

"Capita is deeply unloved but risk/reward is slowly improving," the analysts added.

In particular, Marden and Kirkness highlighted the shares' 5% dividend yield and 7% free cash flow yield.

Should the outsourcer's earnings per share and free cash flows stabilise those should offer "considerable upside", they said.

Ocado got a boost on Monday as Exane BNP Paribas upgraded the stock to 'outperform' from 'underperform' and lifted the price target to 325p from 220p following last week's news that Amazon is buying Whole Foods Market.

"We remain of the view that Ocado is unlikely to be an acquisition target but we concede that the probability of an outright purchase has now increased."

More generally, the bank pointed out that for a US grocer looking at the prospect of Amazon materially pushing on in online food, then for all its many issues, Ocado is a business potentially ready and able to help leapfrog the competition.

"We will concede that valuing Ocado remains 'art rather than science' but on the basis that the shares respond to news flow rather than short-term earnings, we see the potential for them to move higher. If we are looking at multiples then if Amazon paid near 90% of sales for Whole Foods without a material online food business, 100% of sales for Ocado seems far too conservative. Raising that to 150% of sales takes out target price to 325p. Accordingly, we raise the shares to outperform."

Shore Capital downgraded its stance on CMC Markets to 'hold' from 'buy' saying the risk/reward is now more balanced after the shares made a solid recovery from the lows seen in the immediate aftermath of the FCA consultation.

Shore, which had upgraded the stock to 'buy' back in December following what it deemed to be an overly harsh reaction to the FCA review, noted the shares are up 50% since the upgrade.

It said CMC's first year as a listed company "wasn't the smoothest of introductions", with a profit warning in September, a regulatory bombshell in December and then one of the least volatile periods in markets for the last decade.

"We think the company has emerged bruised but is adequately equipped to tackle any near term implications from the FCA’s final determination, expected any time in the next six months. The partnership with ANZ for an Australian retail stockbroking platform, announced in March, will help to offset any expected revenue fall in UK leveraged trading.

"While there is a path to a higher valuation if regulation achieves its ultimate aim of cleaning up the retail leveraged trading industry, removing what CMC CEO Peter Cruddas (correctly) describes as the ‘churn and burn’ operators, we don’t think this will happen overnight."

The brokerage lifted its fair value on the stock to 160p from 150p and said it will re-examine the investment case depending on where the shares settle after the final FCA ruling.