Broker tips: GVC Holdings, Compass Group, Halma

GVC Holdings was given a boost on Friday after Numis raised its rating on the gambling company to ‘buy’ from’ hold’ and reiterated a target price of 765p following “strong” fourth quarter results.

In the fourth quarter to 31 December, GVC said net gaming revenue (NGR) per day was €2.51m - an increase of 7%, or 9% in constant currency, over the same period in 2015.

“This is a strong result given peers such as Paddy Power Betfair only reported flat revenue in the fourth quarter,” Numis said.

The group, which bought Bwin for £1.1bn in September 2015, said it now expects full year group EBITDA to be towards the upper end of the market expectation range of €202.7-€205.5m.

The owner of Sportingbet and Betboo expects pro-forma group net gaming revenue to rise to €894m from €822m.

Numis said the company’s net gaming revenue estimate is 3% ahead of its forecast and 1% ahead of the upper range of previous guidance. The EBITDA guidance is close to the broker’s existing projection.

Following the fourth quarter results, Numis has raised its estimates for full year group revenue and EBIT.

“Although we expect the comparatives to become more challenging throughout the year, e.g. no major football tournament, our previous revenue forecast of €919m (+4% yoy) is too conservative and therefore we are raising this by 1% to €930m with a similar upgrade to EBITDA (to €255m), which is in line with current consensus.”

GVC’s shares have been under pressure the past three months amid concerns about the wider sector, including potential restriction on fixed odds betting terminals and marketing.

However, Numis said GVC has no retail exposure and the encouraging fourth quarter update reaffirms its preference for gambling stocks which have online exposure, strong momentum and wide geographical diversification for mitigating the regulatory impact from any specific regulator.

“This, coupled with the recent share price weakness provides us with an opportunity to upgrade our recommendation to 'buy'. With 24% upside to our 765p target price, the shares are now trading on an undemanding 13.2x 2017E PER and 9.1x EV/EBITDA."

Canaccord Genuity on Friday lowered Compass Group to ‘hold’ from ‘buy’ but raised the target price to 1,460p from 1,370p following the catering company’s first quarter trading update.

In the three months to the end of December, organic revenue was up 2.8%, in line with the group’s expectations and Compass said it continues to see strong levels of new business wins and good retention rates. Organic revenue growth was a touch short of analysts’ expectations of 2.9%.

Meanwhile, like-for-like revenues increased modestly, with some pricing offsetting weak volumes in the Offshore & Remote sector.

The company said its outlook for 2017 remains “positive and unchanged” following strong growth in North America and Europe and Rest of World are performing as expected.

“We are nudging up our target price by 6.5% to 1460p to reflect our increased confidence in the outlook but reduce our recommendation to ‘hold’ (from ‘buy’) as the Compass share price is up 22% on a 12 month view and within 10% of our target price,” Canaccord said.

For fiscal year 2017, the broker expects 4.6% organic growth and a 20 basis point increase of earnings before interest and tax margin.

Canaccord believes Powerhouse North America should deliver 80% of the group EBIT growth driven by organic growth of 7% and five basis point rise in margins.

It expects a small decline in EBIT for Rest of the World as growth elsewhere and restructuring benefits “should not be quite enough” to offset the decrease in the Offshore and Remote business in Australia.
Canaccord added that the company’s major currency is in dollars. Currency movements had a positive translation impact on revenues and profit during the first quarter of £924m and £74m respectively. If current spot rates continue for the rest of the year, foreign exchange translation would boost 2016 revenue by £2.3bn and operating profit by £186m.

“Compass generates just 10-12% of EBIT in the UK and a 1% change in a basket of all its currencies has a £12m impact on EBIT,” Canaccord said.

Halma got a boost on Friday as Barclays upgraded its stance on the stock to ‘overweight’ from ‘equalweight’ and lifted the price target to 1,150p from 1,070p.

The bank noted Halma’s shares have pulled back 20% from their October 2016 high of 1,126p, driven by the rotation out of low volatility ‘bond proxy’ stocks combined with mildly disappointing interim results and an unforgiving valuation.

Barclays said the pullback in the shares and the rotation within the sector towards more cyclically-exposed stocks, leaves them trading on a 12-month forward price-to-earnings ratio of 21.9x the bank’s current estimates, representing a 13% premium to the UK capital goods sector average. This compares with their five-year average premium of 30% and 10-year premium of 22%.

“This is the best sector relative value that the shares have offered for nearly two and a half years (since August 2014). We admire Halma for its consistent, long-term record and therefore view this as a good opportunity to gain exposure to it and upgrade our rating from equalweight to overweight.”

Barclays said Halma’s interim results were slightly disappointing, mostly due a poor first contribution from its largest two recent acquisitions. This was due to delays in gaining customer approval prior to shipment of a major contract at Firetrace and subsequent shipments on one of CenTrak’s major contracts suffered postponement due to third-party delays.

“We view both these issues as temporary,” said Barclays, adding that the outlook at Process Safety should be improving.