Broker tips: Cranswick, Burberry, Ted Baker, Merlin Entertainments

Analysts at Liberum upgraded UK food producer Cranswick to 'buy' on Thursday after the group's recent 20% drop had brought its shares back below its five-year price/earnings ratio for the first time in two years.

While the broker noted the next twelve months could very well bring some "challenging UK trading conditions" as a result of Brexit related concerns and an increased difficulty in gaining market share in the UK pork market, Liberum expects some of these woes to be offset from higher export profits as demand and prices begin to reflect a growing supply shortage in China as a result of the recent African Swine Fever outbreak.

However, Liberum noted, critical to its upgrade, was that Cranswick shares looked set to increasingly anticipate a new wave of higher earnings per share growth ahead of the commissioning of its new 1.2m bird per week poultry plant in 2020.

Liberum noted: "This is phase 1 of Cranswick's investment ambitions to raise its UK poultry market share (currently just 3%) which doubles existing capacity, gives scope to lift revenue per bird and should lower unit costs of production."

The broker, which kept its 3,300p target price unchanged, praised Cranswick for delivering "one of the most enviable track records in the UK of shareholder value creation" but acknowledged that the next twelve months were "likely to bring only low single-digit earnings growth".

Growth prospects for Burberry and other luxury stocks face "undoubtedly more downside than upside risk", warned Berenberg as it downgraded its stance on the sector.

Burberry was moved to 'hold' from 'buy' with the price target cut to 1,920p from 2,270p.

While investors continue to fear a crash in Chinese luxury consumption, Berenberg analysts feel the sector is "structurally better positioned" than it was at the time of the 2012 downturn.

"The underlying drivers of luxury consumption in China, such as middle-class and millennial consumers, are healthier, allowing for long-term sustainable mid-single-digit growth as the sector enters a period of normalisation in demand. However, aware of the current external environment, we believe that, in the near term, volatility is likely to persist and a continued market sell-off creates obvious macro-related risks. "

Sector share price/earnings multiples may now be a "more reasonable" level at 20 times 12-month earnings versus 30 times at their 2018 peak and a 19 times 20-year historical average, but in this current macro environment are seen as "unlikely to expand" and so leaves little upside potential to attract investors.

These relatively elevated multiples are the cause for the downgrades, though the significant balance-sheet firepower of the largest players in the space, "M&A will be the key theme" in the coming Year of the Pig, the analysts said, and "the only reliable source of earnings upgrades".

Ted Baker was under pressure on Thursday as Goldman Sachs downgraded its stance on the fashion retailer to 'neutral' from 'buy' as its new target price of 2,150p, up from 2,000p, suggests about 1% upside versus an average of 17% for the bank's coverage.

On Wednesday, the company posted a 12.2% rise in retail sales for the five weeks to 5 January, with e-commerce sales up 18.7%.

GS, which noted that gross margins remain in line with management expectations and the year ended with a clean stock position, cut its FY19 pre-tax profit estimate by £1m to £74m.

It pointed out that since being added to its 'buy' list on 9 April 2018, the shares are down 21.3% versus the FTSE World Europe up 8.1%, following a 14% drop in FY20 consensus earnings per share estimates.

HSBC took a different view of Ted Baker, however, upgrading the stock to 'buy' from 'hold' and upping the price target to 2,215p from 1,450p on reduced brand uncertainty following the Christmas trading update, which it said was better than expected.

UBS recommended clients sell Merlin Entertainments shares on Thursday after its research showed a decline in average reviews at the group's Midway attractions and Legoland parks in the UK.

The Swiss bank, which downgraded its rating from ‘neutral’ and cut its target price to 295p from 380p, said the research had made it "more cautious" about the Midway recovery, worrying that "this trend could be the result of poor investment or operational decisions" as management look to cut costs and "suggests further weakness in 2019".

Customer review data for the Midway divisions, included London Eye and Madam Tussauds London seeing "meaningful" year-on-year declines in average review scores, with new brand Little Big City the third worst performing brand in the group for reviews.

The the core London sites accounting for more than a third of profits but just 5% of sites, the analysts said such declining reviews and hence attendance "could have a disproportionate effect on Midway profitability" and so reduced their forecasts for like-for-like growth from the division this year from 2% to 1%.

Legoland is still seen as a strong Merlin brand, "with clear roll-out potential" around the world, but the weak LFL growth performance last year highlights risks to growth, with customer review data showing a "significant" decline in average reviews at Legoland Windsor, which may remain a drag in 2019, and leading to another cut in LFL growth forecast from 4% to 3% for 2019.