Broker tips: Clarkson, Just Eat, Marks and Spencer, Strix

Liberum downgraded FTSE 250 shipbroker Clarkson to 'hold' from 'buy' and cut its price target to 3,200p from 3,600p on Monday following a profit warning, as it reduced its forecasts on quieter asset transaction markets and FX.

Earlier, Clarkson warned that both first-half and full-year profits are now expected to be "materially below" the previous year following a number of headwinds in the first quarter.

In a very brief trading update, the company said that the "challenging environment" in shipping and offshore capital markets has led to transactions being pushed back and has compounded a quiet period in sale and purchase activity for the group across shipping and offshore. In addition, Clarkson has suffered from lower freight rates within the tanker market and a fall in the value of the US dollar, which is the main trading currency of its banking and broking businesses.

As a result, Liberum has cut its forecasts by 25% for the current year and 15% for 2019. On its revised forecasts, Clarkson trades on 2018E price-to-earnings of 31.5x and dividend yield of 2.4%. Liberum said that while Clarkson warrants a premium rating based on its market position and the potential to benefit from better market conditions, it is difficult to see a re-rating from current levels.

"The cut to earnings estimates is clearly disappointing, especially after the optimism on markets expressed by management at the FY results in March. However, we see the short-term challenges as reflective of uncertainty suppressing transaction activity in asset markets, and the capital markets that fund them, rather than the result of a widespread reversal in freight rates.

Liberum said demand and supply should come into better balance as constraints on shipyard capacity and bank financing limit supply growth, with tighter environmental legislation likely to accelerate the scrapping of older ships.

"Clarkson remains well positioned to benefit from better market conditions, even if they are still not yet upon us, having deepened and broadened its capabilities to build an unrivalled market position."

After seeing its shares fall roughly 15% since announcing its £50m investment in delivery at its full-year results back in March, the risk/reward from Just Eat moving into delivery was seen as "highly attractive" and a "sensible" use of capital by analysts at Berenberg, who gave the London-based group another look on Monday.

Just Eat claimed - and Berenberg agreed - that early data showed that entering the delivery market could help it to acquire new customers and negatively affect the growth of its competitors.

Nevertheless, the broker believed that traditional takeaway was by no means a "dying market" and that the online company's largest hurdle would come in the form of customers ordering by telephone, which remained the dominant food ordering method in most its markets.

"We expect Just Eat to continue to take share away from this sub-optimal competitor providing a runway of growth for many years to come. Within the more nascent, extremely fast-growing delivery segment, where Just Eat today has limited market share, we think the company is well placed to capture a material portion of the growth," the analysts wrote in a Monday morning research note.

Just Eat, which already has the largest set of takeaway customers of its peer group, was seen as being in somewhat of a "damned if they do, damned if they don't" scenario at Berenberg, with investors punishing it for entering the delivery segment but at the same time arguing that it does pose a threat to Just Eat.

Either the delivery model is flawed and the company will never see a return on the money it is spending or the delivery model could become a viable threat to the company and to a sustainable and scalable business model.

"By leveraging its existing brand, corporate overheads and marketplace customers, Just Eat has as good a chance of any of reaching profitability in delivery," the analysts stated.

Berenberg reiterated its 'buy' rating on Just Eat shares but trimmed its target price from 850p to 840p per share.

With the shares down 10% year-to-date and limited downside to its unchanged price target of 285p, Credit Suisse upped its stance on retailer Marks & Spencer to 'neutral' from 'underperform' on Monday.

The bank trimmed its pre-tax profit estimate for 2017/18 by 3% ahead of M&S's preliminary results on 23 May, to reflect weak trading in the fourth quarter due to poor weather.

CS said it assumes pre-tax profit will drop a further 4.5% to £539m in 2018/19, driven by another year of weak like-for-like sales and assuming price investment continues in food, but with few FX pressures across the business.

Credit Suisse said structural issues remain but the velocity of change in the business has picked up.

"Most of the issues we highlighted in our January downgrade note such as competition, weak demand, poor footfall, core demographics, space, lagging online haven't gone away; however, the last three months have seen signs of UK consumer environment starting to turn with real-wages beginning to recover, inflation easing particularly in food, aided by pound strength which should all give some breathing room to the transformation programme."

The bank said that the flurry of announcements since January on management changes, store closures and logistics reflect the sense of urgency communicated by Archie Norman and Steve Rowe back in November.

"We believe execution still remains a risk given that leadership team apart from the CEO is mostly new," it added.

With high margins, low capital intensity and strong cash conversion, kettle controls manufacturer Strix looked like an attractive prospect to Canaccord Genuity's analysts, pressing the button on a 'buy' rating for the AIM-quoted firm on Monday.

Strix, which has an approximate 38% market share of the design, manufacture and supply of safety controls for electric kettles across the globe, produces roughly 70m kettle controls each year, most of which are sold to 180 original equipment manufacturers in China, as well as 400 brands and retailers worldwide where its products are used an estimated 1bn times per day.

Canaccord pointed to Strix's long track record of sustainable profitability, having generated over £30m of adjusted EBITDA in each of the last ten years.

On top of that, the 5.6% gain in the electric kettle market last year is coupled with the firm's high margins, low capital intensity and strong cash conversion, leading to an estimated 7.1% increase in demand over the next two years and enabling a progressive distribution policy.

Canaccord saw further growth potential flowing from Aqua Optima, Strix's UK water filter brand, which has a long-term licence to supply Tommee Tippee with bespoke filters for its successful Perfect Prep baby formula appliance and also from its work on expanding its technologies into different geographies including China and the USA.

In addition to the 'buy' rating, Canaccord issued Strix, which was currently trading at 137p, a price target of 210p per share.