Broker tips: Dixons Carphone, Greencore, Rolls-Royce

Goldman Sachs has initiated coverage of Dixons Carphone at ‘neutral’ with a 350p 12-month price target, saying the company is well-positioned in the medium term to deal with the structural challenges it faces.

The bank said that its full-year pre-tax profit estimate for 2018 is broadly in line with consensus and a near-term re-rating is unlikely in the absence of catalysts , especially given the continuing overhang from an uncertain UK outlook, hence the ‘neutral’ stance.

GS said progress on pricing and suppliers’ support should help sustain market share in electricals in the face of pure-play competition, while continuing subscriber momentum should limit disintermediation risk in UK mobile.

“Progress on pricing, closer relationships with suppliers (with Dixons’ stores effectively acting as a display and distribution channel for electrical suppliers) and a solid distribution and service network, combined with ongoing share losses at smaller independents, should support stable to modestly rising market share for Dixons in UK electricals. Overall, we forecast circa 2% underlying top-line growth for the UK and Nordics electricals businesses mid-term.”

Numis has upgraded its recommendation on Greencore to ‘buy’ from ‘add’ with an unchanged target price of 285p, after the food producer reported “excellent” first quarter sales.

For the quarter ended 30 December 2016, revenue of £417m was up 17.1% on a reported basis. On a like-for-like basis, excluding revenue from The Sandwich Factory acquisition in July, sales rose 9.1%.

In the convenience foods division, revenue increased 16.4% to £401.6m on a reported basis and up 8.9% on a LFL basis.

In the UK, revenue rose 13.9% and up 9% on a LFL basis due to growth in the Food to Go business, which benefitted from new business wins.

The company is confident that it will deliver 2017 financial year results in line with expectations, notwithstanding the investments in the US and UK.

Numis said the results were “highly impressive” and the company has cleared up an number of investor concerns, including rising input costs and the performance of newly acquired US convenience food producer Peacock Foods. Peacock was bought for $748m in December.

“The key points in our view were thus. 1) The pointers to some future revenue synergies from Peacock Foods in the US (none were assumed when the deal was unveiled). 2) Management's confidence that higher input and labour costs can be coped with this fiscal year. These will be £20-25m for the UK operations in terms of raw materials & packaging and £13-15m for labour costs, with US labour costs likely to be higher in high single-digits in $ms. 3) the reiterated warning that UK investment and commissioning costs will feature and will lead to a second half-loading to progress for the 'old' Greencore this fiscal year. 4) The pointers to Peacock Foods' sales performance in the fourth quarter calendar year 2016 being in line and running in mid to high single-digits then: akin to the prior pointers to market growth for its key categories.”

Aerospace and defence group Rolls-Royce got a boost on Wednesday as UBS upgraded the stock to ‘buy’ from ‘neutral’ and lifted the price target to 835p from 800p.

The bank said the shares were “unloved”, with a high level of scepticism about management's ability to deliver adequate levels of free cash flow in 2018-20.

UBS estimates cash generation is close to £850m in 2019E and £1.1bn in 2020E, including £640-680m from the non-Civil Aerospace activities. It said investors are ascribing little value to cash improvement in 2019/2020.

“Over 2017, we think investors will gain more comfort on management's ‘grip’ on the business. 2016 was the first year without warnings since February 2014, and the 2016 outlook was raised slightly in Jan 2017. The FY16 results are due on 14 Feb, with potentially further cost-reduction announced.”

UBS said its industrials and commodities teams are becoming more constructive on the short-cycle industrial end markets, and the bank retains its positive stance on the defence spending outlook in the US and the UK.

The bank said RR’s non-Civil Aerospace businesses could surprise positively in 2018 and provide more confidence to the story. It noted Rolls has around 33% of its group sales exposed to early/short-cycle industries where it is seeing improving trends, and 16% exposed to defence spending, which is at the beginning of an upcycle.