Broker tips: Home Retail, Dechra Pharma, StanChar

Dechra Pharmaceuticals remains a strong stock with plenty in the pipeline, according to Investec on Thursday.

In a trading update for the first half, the company reported revenue growth of 15% at a constant exchange rate (CER), including the integration of Genera which was bought in October 2015. At the actual exchange rate (AER) revenue increased 10%.

EU Pharmaceuticals, excluding Genera, saw revenues rise 4% at CER but exchange rate headwinds saw revenues decline 3% at AER. Growth was driven by Companion Animal Products (CAP) which increased 4% at CER.

Total reported North American revenue increased by 51% at CER on the same period last year.

“Dechra’s trading update for the first half 2016 results (to end-December) demonstrates a company on track to meet full-year estimates with strong growth in North American pharma and EU CAP,” said Investec analyst Cora McCallum.

“The integration of Genera (acquired in October 2015) is proceeding well, and contributed four percentage points to total underlying growth. Pipeline progress is strong with FDA approval for Zycortal in December and two Food producing Animal Products antibiotics gaining EU approval in the last quarter.”

Investec reiterated a ‘buy’ rating and issued a target price of 1141p.

Home Retail was under the cosh on Thursday as Canaccord Genuity downgraded its rating on the stock to ‘sell’ from ‘hold’ after the owner of Argos guided lower on profits.

The company said its full year profit was forecast to come in at the lower end of expectations after Argos sales over the festive period fell.

Sales at Argos 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.

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 last night it is in talks to sell off Homebase to an Australian conglomerate.

“Were a bid at a higher price to emerge, we would regard this as a ‘get out of jail free’ card for beleaguered Home Retail shareholders, given the stuttering trading performance under its digital transformation strategy against some formidable competitors,” said Canaccord Genuity.

“We are therefore moving to ‘sell’ from ‘hold’ on the basis of our view of fundamental valuation and our view of the uncompelling strategic rationale of a potential bid from Sainsbury. We believe today's trading update makes a bid from Sainsbury less rather than more likely.”

The broker kept its target price unchanged at 115p.

Standard Chartered has been upgraded from ‘hold’ to ‘buy’ by Berenberg, citing recent events giving it three key catalysts for the company to change.

In a note released on Thursday, it said the bank is no longer a “loser” and now has “a core business to focus on, enough capital to afford change and external management”.

“Most importantly, new management has introduced a risk/return focus, moving away from the historical focus on growth.”
Berenberg said current valutaions of 0.55x its tangible book value give a margin of safety despite a number of concerns.

“To trade back to TBV, management needs to rebuild confidence in the balance sheet,” it said.

“We see the new return and risk focus as the first part of that.”
It also noted that delivering early on its 8% return on equity target and keeping 2018 costs below 2015 levels would also help.