Broker tips: Go-Ahead, Acacia Mining, Berendsen, JD Wetherspoon, WPP

Liberum has downgraded transport operator Go-Ahead to ‘hold’ from ‘buy’ and cut the price target to 2,100p from 2,440p, saying it now assumes no value or earnings from the Govia Thameslink Railway franchise.

Last Tuesday, the group, which owns 65% of the Southern franchise through GTR, reported a drop in first-half pre-tax profit as operating profit from the rail division slumped due to strike action, and it lowered its full-year expectations for the bus and rail divisions.

Liberum said the cut to the 2017 outlook on slower regional bus growth and extra rail costs was disappointing, but manageable.

“Higher capex, and hence net debt, has a bigger impact on our valuation. We are increasingly concerned that there may not be any value in the GTR rail franchise, with further execution challenges ahead. We now assume no value or earnings from GTR.”

The brokerage said Go-Ahead’s valuation remains underpinned by its bus divisions, but the upside potential is entirely dependent on either winning the replacement competition for the London Midland franchise or extracting value from the GTR franchise.

“We do not see this as a strong enough investment case to support a continued positive stance.”

Acacia Mining

Acacia Mining was under the cosh as Jefferies downgraded the stock to ‘hold’ from ‘buy’ and cut the price target to 475p from 575p.

It said news flow on Friday of the ban on copper/gold concentrate exports from Tanzania has direct and indirect impacts, negatively affecting several points of its prior investment thesis.

“With no clarity over a type or timing of a resolution, we fear Acacia shares will be suppressed and downgrade our recommendation.”

On Friday, the company acknowledged a press release from the Tanzanian Ministry of Energy and Minerals regarding a ban of gold/copper concentrate exports, effective immediately.

It said it has has ceased exports of gold/copper concentrate and was urgently seeking further clarification from the Ministry of Energy and Minerals.

Jefferies said the direct impact on the group is clear as last year, this represented around 30% of group revenues.

“While the direct impact is clear, it is more than just greater uncertainty driving today's downgrade. Our past investment case and bullish view on the shares rested on several factors including growing free cash flow, higher shareholder returns, strengthened in-country relations and catalysts for a lowering of the ABX stake.

“All of which have now been negatively impacted, making the argument for a valuation re-rating much harder to justify.”

Berendsen

HSBC has downgraded Berendsen to ‘hold’ from ‘buy’ and chopped its target price to 940p from 1,070p as it believes that the commercial laundry company's proposed investment in the UK is going to cost more than management currently calculate.

HSBC said that investing in the UK is going to cost more and the company guides of a 2017 earnings before interest, tax and amortisation (EBITA) of £150m, as the consensus by Bloomberg forecasts £164.5m.

Berendsen said it will spend £150m a year on its plants and equipment for next three years, while new management, higher central costs and some effects of the National Living Wage will drive costs up initially, but the company is confident that margins will improve.

Last Friday, the company was the biggest faller of the FTSE 250 index as it posted a rise in full-year profit and revenue but was more cautious on the outlook as continues to be affected by "legacy issues".

The company’s guidance for 2017 was an adjusted operating profit of £150m, which is 12% below consensus of £170m, and said results are expected to be more second half weighted than previously due to legacy issues in the UK.

In light of this, HSBC updated its forecasts for foreign exchange rates, the UK performance, the new guidance and lowered Berendsen’s earnings per share by 12% in 2017 and 11% 2018.

HSBC has assumed that planned investments made in the UK will begin to bear material fruit from 2019 and so derives the target price by applying a price estimate 16 times on the 2017 earnings per share, which implies a target price of 940p, a 1.3% upside.

To deal with its legacy issues, the company plans to use its CL2000 production concept, as its uses in Europe, to the UK workwear markets and in the healthcare and hospitality business a new plant will be made more efficient in the next three years similar to the CL2000 plant used in the workwear business.

Berendsen believes that after a period of transition, it will make a 15% return on capital employed on these investments and its performance will be second half weighted.

JD Wetherspoon

Shore Capital has downgraded pub group JD Wetherspoon to ‘sell’ from ‘hold’, saying the aggressive re-rating beyond past metrics leaves investors exposed should margins not recover towards 10% in the medium term.

The brokerage mentioned that in its pre-close update last July, Wetherspoon delivered a much better than expected margin performance, which has continued into the current year, breaking a long-term downward trend.

The stock re-rated as a result, leaving it trading on multi-year multiple highs, with Shore reckoning the market is now pricing in a recovery in margins to around 10%, which is a level not achieved since FY2010.

“Although we see JDW as a first-rate operator with scope to build margins from current levels, industry headwinds could limit progress. With limited visibility and a high sensitivity to margin development we downgrade.”

Shore noted operating margins have fallen from 10% in FY2010 to just 6.9% in FY2016.

However, second half 2016 margins improved to 7.5% after an exceptionally strong fourth quarter and this has continued into the current year, with first-half margins estimated by management at 8%.

“While H2 FY2017F margins are set to fall our full year estimate of 7.4% appears lowballed, although a rising freehold mix/disposals may explain a proportion of the recent improvement.”

At around £2m per pub, Wetherspoon is valued at a near two-decade high despite profit per pub being unchanged over the period. This is reflected in a free cash flow yield approaching a low of 7% despite only a modest new build programme, low returns and the balance unlikely to provide such a favourable tailwind as in the past.

“We believe the market is now pricing in a recovery in margins to 10%.

“We believe that the aggressive re-rating beyond past metrics leaves investors exposed should margins not recover towards 10% in the medium term. Should margins fail to build from current levels, fair value could be circa 650p per share."

WPP

Analysts at Credit Suisse lowered their target price on WPP's shares following revised guidance from the advertising giant.

On 3 March, WPP guided towards organic revenue growth of about 2% for 2017, less than the 3% consensus had penciled in.

In the opinion of the broker's analysts, in hindsight WPP's belated admission that growth would be less than 2016's 3.1% pace was foreseeable after it lost the VW and AT&T accounts, cutting 100 basis points from its forecast rate of sales growth.

The main drivers of WPP's downgraded guidance were revised budgets in February 2017, as well as instances of underlying softness in some businesses and regions like the UK.

WPP also admitted increased competition between ad agencies was hurting pricing power.

The failed bid for Unilever and increased pressures on fast-moving-consumer-goods companies to cut costs might also entail "downside risk" to the the company's 2.0% target, said analysts Matthew Walker, Joseph Barnet-Lamb, Sophie Bell and Stephanie MacAulay in a research report sent to clients.

Nonetheless, there was no evidence of structural damage thus far they said, pointing to forecasts from rivals such as Omnicom and IPG for organic growth of about 3.5% in 2017. Indeed, Dentsu expected growth of between 3% and 5%.

"Almost all agencies are looking for 30-50bps of margin expansion despite transparency pressure in US media buying. In most pitches agencies are not coming up against the consultancies. Evidence for recent dis-intermediation by Apple and Google is slight," the analysts added.

A potential investigation into media by the US Department of Justice, pressures on gross domestic product and account losses were among the chief risks to watch out for, the analysts said.

Credit Suisse reiterated its 'Outperform' recommendation but lowered its target price from 2,000p to 1,920p.

Standard Life and Aberdeen Asset Management

After Standard Life and Aberdeen Asset Management revealed they had agreed terms on a potential £11bn merger, City of London analysts mostly came out in support of the deal, some suggested a bid battle could ensure and others highlighted risks.

The proposed merger, which will produce a company with assets under management north of roughly £660bn, is expected to conclude in the third quarter of 2017.

Given the company's confirmation of synergies at £200m, higher than its initial estimates, Citi saw the deal adding 15%-20% earnings enhancement for both companies.

The deal should "alleviate many... headaches" for Aberdeen, having struggled with 18 consecutive quarters of net fund outflows, relative investment performance issues and a lack of significant new drivers for fund gathering.

For Aberdeen shareholders, Jefferies stated that in the first instance, a nil premium merger means they are no better off than at last close.

"However, on the basis of our existing standalone forecasts and potential dividend uncertainty, we had a 221p price target. The merger underpins a current share price of 287p, removes dividend uncertainty and could benefit from cost synergies."

Looking at potential scale of cost-cutting, a target for savings of 10% of the combined group would equate to £32m of post-tax gain for ADN, which would boost its earnings by 13% compared to Jefferies' 2017 forecast.

Analysts at Olivetree, while also noting the meaningful overlap between the two shareholder registers with the top 75% of Aberdeen holders own 25% of Standard Life, said the deal was very much a progression of Standard Life’s ongoing move from life assurance to asset management, but that it was a "transaction that it is hard to get excited about, either for positive or negative reasons".