Broker tips: Charles Stanley, Playtech, Berkeley Group

Cannacord Genuity lowered its target price on the shares of Charles Stanley and lowered its recommendation from 'buy' to 'hold' after the broker announced it would likely take between 12 to 18 months longer than originally anticipated (by the year to 31 March 2020) to reach its target of 15.0% for operating margins.

In particular, analysts Salvatore Caruso, Bill Barnard and James Ash highlighted how resolving the issue of variable compensation for its investment managers still held the key to unlocking value.

Nonetheless, they described Charles Stanley’s 2016 results as “resilient” given the impact of market conditions on Funds Under Management and Administration, with profit before tax printing ahead of their estimates.

Even so, the analysts pared their estimates for the firm on the back of the delay in reaching the 15% operating margin target and lower revenue yields.

Their earnings per share estimates for 2017 and 2018 were cut to 11.7p and 21.6p, or by 40% and 28%, respectively.

Canaccord also reduced its one-year forward multiple for Charles Stanley’s shares from 17.5 to 13.0 to reflect slower profit growth. It was also a reflection of the risk factors specific to the broker.

When combined with Canaccord’s new estimate for fiscal year 2018 EPS of 21.6p, that multiple yielded the new 12-month target price of 280p (previously 340p).

Morgan Stanley set a 1,170p price target for Playtech, offering around 50% upside from current levels, as the FTSE 250 outfit is "a software company not a gambling company".

Playtech, which provides back-end support for gambling companies, creates gaming software content, takes 86% of revenues are derived from revenue-share fees.

"We benchmark the company to the software peer group, and conclude that the shares warrant a significant re-rating in-line with software peers," Morgan Stanley said.

Analysts observed that with 35% revenue compound annual growth the company is among the fastest growing businesses in the technology sector and growing far faster than the gambling sector, with more than 80% of revenues also recurring.

Margins are much closer to the technology peer group, well above gambling operators, while cash conversion benefits from most of its development costs being expensed.

Concerns about corporate governance and competition were largely dismissed by analysts, who also highlighted than no value seemed to be attributed to the Asian facing business.

"Playtech is the market-leading online gambling supplier, taking market share in a high-growth end market," they added, arguing that its strong growth and cash generation are not reflected in its valuation.

Berkeley Group Holdings remains "a very well managed business" but it was not immune to the weakening conditions which were being experienced in the inner London new build housing market, analysts at Credit Suisse said.

For that reason, analysts Samuel Thomas and Harry Goad reiterated their 'underperform' recommendation on the stock of the company even as they revised their target price considerably higher.

In particular, they noted how management at Berkeley had highlighted significant market weakness in current trading, with no new launches having been made over the five-month period to May and reservations down by 20% year-on-year.

Market conditions for properties over the £1.25m threshold appeared to be particularly challenging, Thomas and Goad said in a research note sent to clients and dated 15 June.

Nonetheless, following Berkeley's fiscal year 2016 results the broker revised its estimate for earnings per share in fiscal year 2017 2.0% higher.

Likewise, after rolling over their target price matrix onto their fiscal year 2017 earnings forecast for the company, the target price rose from 2,372p to 2,648p.