Broker tips: Home Retail, AB Foods, Tate & Lyle

Home Retail has made it "difficult to mount a convincing defence against any bid from Sainsbury" after reporting disappointing sales over the Christmas period, Numis said on Friday.

Sales at its Argos brand for the 18 weeks to 2 January dropped 2.2% compared to consensus for a 0.3% increase. A 5% increase in sales at Homebase also missed forecasts for a 5.3% rise.

As a result, the group said annual profits were now set to be at the bottom end of current expectations of £92m-£118m.

The company has been in the sights of supermarket Sainsbury’s in recent months and also announced on 13 January it was in talks to sell off Homebase to an Australian conglomerate

“Another poor performance by Argos over the critical Christmas peak causes a further 12% reduction in group pre-tax profit forecasts,” said Numis analyst Matthew Taylor.

“This makes c.30% downgrades over the past year against a benign retail backdrop, leaving it difficult to mount a convincing defence against any bid from Sainsbury.”

Taylor added that that the proposal to sell Homebase seemed to involve “quite heavy leakage costs and the exit multiple (24% of sales) does not appear overly generous, but would at least leave the remaining group in a very sound financial position ”.

“The shares trade on 16x PE to cal-16F, a 10% premium to the sector before the potential dilutive effect of the proposed Homebase disposal.”

Numis recommended a ‘hold’ rating and a target price of 150p.

Canaccord Genuity reiterated a ‘sell’ rating on Associated British Foods on Friday, citing flat first quarter Primark sales.

AB Foods on Thursday said in a trading update on Thursday that its sales rose 7% in the 16 weeks to 2 January at constant currencies but fell 3% at actual exchange rates due to the weakening of the euro against sterling.

While the group did not disclose its sales figures for its low cost fashion retailer Primark, it said it had been strong in the first seven weeks of the quarter but weaker in the following nine weeks on unseasonably warm weather.

Analysts suggested that this meant trading had been flat.

“The first quarter interim statement reveals Primark like-for-like (LFL) sales are running about flat (consensus +2%), hurt by the unseasonably warm weather across most of Europe this winter,” said Canaccord analysts Alicia Forry and Eddy Hargreaves.

“The LFL performance is disappointing, given the easier comparatives in the period compared to the upcoming second half, but strong operational control of the business has limited markdowns thereby delivering better than anticipated margins.”

Canaccord left its target price at 2,600p.

Tate & Lyle was a high riser on Friday following an encouraging capital markets day.

Liberum, which reiterated its ‘buy’ rating on the stock, said Tate hosted a “confident” CMD focused on the group’s Speciality Food Ingredients unit.

The broker said Tate laid out credible plans to deliver its ambition to transform the group into a materially SFI-focused business by 2020.

“Over the past 18 months, Tate has significantly upgraded SFI’s capabilities and skills while realigning the group's portfolio to benefit from global demand for healthier and convenient foods. We were impressed by the SFI team and believe they are well positioned to outperform end-market growth of 4-5% growth and expand margins.”

Liberum expects Tate's recovery to lead to improving free cash flow generation as margins rebound.

It forecasts a strong pick-up post FY16 with free cash flow that covers progressive dividend payments from FY17.

In addition, it said improving FCF generation puts Tate’s balance sheet on a better footing. The broker estimates a 40% drop in net debt by FY18, which in turn will give management the flexibility to accelerate investment in SFI or undertake bolt-on M&A.

“In our view management should not be afraid to take more aggressive steps to improve FCF generation or fund strategic investment or M&A including selling non-core assets such as sucralose or even holding what is a generous dividend flat in favour of investing more aggressively behind SFI capabilities."