Broker tips: Homeserve, Domino's Pizza, Indivior, Standard Life, Interserve

Homeserve shares tanked on Monday as Jefferies downgraded the stock to 'undeperform' from 'hold' and slashed the price target to 460p from 560p.

Jefferies said that with the US growth potential largely priced in, it is concerned about momentum in the UK over the next 12-18 months driven not just by a doubling of insurance premium tax but due to prescriptive changes mandated by the FCA on policy renewals.

"With some questions over the strategic rationale of recent digital investments and mixed history overseas we move to underperform."

Last August, the FCA released a policy statement to increase transparency and engagement at renewal in general insurance markets. As a result, insurers must now disclose the previous year's premium at each renewal, include text to encourage consumers to check their cover and shop around and on the fifth renewal include additional prescriptive text encouraging them to shop around.

Jefferies pointed out that Homeserve - whose home cover policies are treated as an insurance product - could see its retention and income per customer suffer as a result of the changes.

The bank reckons the impact in the UK could be material due to the use of teaser rates, with year one rates discounted by as much as 90%.

"Given the large step up to a full price in year two, as well as on-going inflationary increases for year 2+ customers, we expect this change could cause price increases to be contested more keenly. This change could negatively impact income per customer and retention as more discounting is required and customers leave."

Jefferies also cast doubt over the company's digital investments. It had expected Homeserve to develop something similar to an Uber/Just Eat solution to access the on-demand segment. However, it said the £37m acquisition of Checkatrade in the UK and Habitissimo in Spain do not fulfil this requirement.

Domino's Pizza

Citigroup has downgraded its stance on Domino's Pizza to 'neutral' from 'buy' and cut the price target to 350p from 480p as it pointed to premium multiples and slowing like-for-like sales.

It noted the shares fell 12% on the back of the FY2016 results, mostly related to a sharp slowdown within the company's core UK business for the first nine weeks of 2017.

Citi said the slowdown reflects tough comparatives, market softness and competitive pressure, with UK LFL up 1.5% for the first nine weeks of the year, marking the slowest rate of growth since 2004.

The bank expects the rest of the first half of 2017 to be equally challenging, with the group lapping more than 10% LFL sales growth achieved in 1H16.

"Further volume headwinds exist in 2H17e as pricing may be used to offset creeping food inflation pressure. We now forecast +2.5% LFL sales growth for Domino’s UK business for FY17e (from 5.0% previously). This implies a recovery in 2H17e driven by more effective promotional activity and softer comps in 2H16."

In addition, Citi pointed out that Domino's premium valuation leaves little margin for error, with the shares trading at a calendar year 2018 price-to-earnings of 21x.

Indivior

Indivior shares were under pressure on Monday after RBC Capital Markets downgraded its rating following the pharmaceutical’s cautious guidance for 2017.

The rating was cut to ‘sector perform’ from ‘outperform’ as Indivior's recent results for 2016 were in line with expectations but the cautious 2017 guidance and the ramp-up launch for its monthly RBP-6000 depot addiction treatment disappointed RBS, though it still hiked its price target to 390p from 370p.

The broker adjusted down the heroin substitute maker’s earnings per share by 10%, which remains above guidance and in line with consensus, while the 13% rise in the price target to 390p reflected the increasing value of assets in its pipeline.

FTSE 250 Indivior adjusted its guidance for this year based on US antitrust litigation which could be “materially higher” than provisions and RBC said that its share price will be dominated by litigation and while shares are optically cheap, underlying movements suggested caution.

RBC highlighted the importance of RBP-6000 and thinks its future lies in its ability to launch and switch patients to the depot before competitor Braeburn can. It now targets total revenue opportunity of $1bn, but believes the launch profile will be slower than first anticipated given “key challenges” that need to be overcome.

The broker moved Indivior’s 2017-18 financial year revenues down between 5% to 3% due to increasing pricing pressure on the residual film business and new product launches, while the the impact on profits is more pronounced with a 10% decline due to ongoing legal costs, which it estimates to be around $50-75m.

It sees meaningful investor returns if Indivior buys complementary products, defends itself from litigation, holds its market share and launches RBP-6000 and 7000 on time, however RBC advises “caution in the near term”.

Standard Life

Berenberg has downgraded Standard Life to 'hold' from 'buy' and cut the price target to 400p from 416p, saying the merger with Aberdeen Asset Management offers little upside and substantial risk.

Earlier this month, Standard Life and Aberdeen announced that they had agreed the terms of an £11bn merger that will create one of the largest active investment managers globally, with £660bn of assets under management.

But Berenberg reckons the benefits, if any, rely more on a major change in fortune for Aberdeen’s funds than they do on any cost savings, and said the level of disruption that could be caused to Standard Life’s business is high.

"The strategic rationale for more scale at lower cost, product breadth, wider client coverage and greater diversification is reasonable in the context of a challenging market place for active fund managers.

"However, Standard Life Investments arguably already had reasonable scale in many core areas and a renewed focus on costs. It had invested much time and money in building diversification and its organic growth strategy in areas where it was underweight had shown early signs of bearing fruit. Continued disciplined execution of the existing strategy would have paid off, in our view, and carried less risk. Patience is a virtue that seems to be lacking in Standard Life’s boardroom."

Berenberg pointed out Aberdeen has seen worrying net outflows in the last three years, particularly in funds with high margins.

The bank's base case assumes net flows will gradually improve, but Berenberg said this may be optimistic.

In addition, it highlighted concerns that the integration phase will bring about unwelcome distractions, loss of focus and likely disruption of fund flows at both companies.

Interserve

Peel Hunt has downgraded construction and support services group Interserve to 'reduce' from 'hold' and chopped its price target to 200p from 250p saying the new chief executive has lots to do and not much time to do it in.

Earlier this month, Interserve announced that Debbie White will replace Adrian Ringrose as CEO with effect from 1 September.

The brokerage said the challenges facing the new CEO are significant, but with her support services/finance background, there must be a temptation to radically refocus the group.

Peel said "surgery" is required to strengthen the balance sheet and position the company for higher quality earnings growth, but it added that given the continuing risks from waste to energy and the growing debt burden, the window for proactive change is limited.

"In our view, the valuation support provided by Equipment Services is not compelling enough to offset the risks (many beyond management’s control)."

Peel Hunt highlighted the group's debt issues, noting the market cap is £334m and FY2017 peak net debt is expected to be £485m.

In addition, it said the principal earnings/balance sheet risk still rests with the energy from waste contracts, namely Glasgow and Derby. Peel argued that the £160m provision relies on certain recoveries and assumes the process technologies will work.

"We believe that it could be at least 12-18 months before any real clarity can be provided on the provision, but our experience would suggest that there is still a risk of material increases."

In February, Interserve said the cost of exiting its troubled energy from waste projects had risen from £70m to £160m.