Broker tips: Debenhams, G4S, IHG

Debenhams was under the cosh on Wednesday as Liberum downgraded its stance on the department store chain to 'sell' from 'hold' and cut the price target to 40p from 58p as it revisited the investment case following the group's prelims.

"Looking past the low current rating (CY18E PER 8.4x), we focus on the fundamentals, which do not enthuse us," it said. The brokerage argued that ongoing structural challenges, a soft consumer environment, rising costs and increasing capex demands make for a difficult outlook.

Liberum acknowledged management's ambition and the progress made so far with the ‘Debenhams Redesigned’ strategy. However, it highlighted long-term structural challenges which it reckons will demand increasing investment just to maintain - at best - market position.

"Mid-market department stores are being squeezed by more premium players, specialists and online. We acknowledge the progress under the new CEO, but turning 13m sq. ft. into ‘destination’ space is tough. Material closures/right-sizing will take time."

Security services company G4S was on the front foot on Wednesday as Jefferies upgraded the stock to 'buy' from 'hold' and lifted the price target to 330p from 270p.

It noted that the shares have underperformed on the back of disappointing second-quarter organic revenue growth, but said momentum should recover in the first half of 2018, helped by improving emerging markets and US wage inflation.

"A new Cash360 contract should contribute 1% to organic revenue growth from Q4; emerging markets momentum should improve over the next 12 months; US wage rate inflation has accelerated sharply; and the bid pipeline continues to edge higher," it said.

Jefferies pointed out that according to the Bureau of Labor Statistics, security wage inflation has accelerated sharply to 10-15%.

Intercontinental Hotels' new US midmarket brand, Avid, is the group's biggest launch for more than 25 years, analysts at Credit Suisse said as they upgraded the company to "outperform".

Based on 2m pieces of customer feedback, the analysts said there was scope for a midmarket chain chain providing greater consistency and value for money to shake up the market.

The midscale segment is underserved and Avid, launched in September, is in a position to carve out a successful niche, they argued. Avid will be positioned just below the "upper midscale" where IHG's Holiday Inn Express sits. Avid is IHG's most significant launch since Holiday Inn Express in the early 90s, they argued.

There has been a lack of supply growth in the midmarket hotels segment in the past decade and its share of revenue has been declining partly because owners and customers have been disappointed by offerings, the analysts said.

"We believe it is immediately clear that IHG views the midscale segment [...] as ripe for a scale offering that strikes a better balance between quality and value relative to the existing offering," the analysts wrote in a note on Wednesday.