Broker tips: InterContinental Hotels, Dunelm

Credit Suisse cut its price target on InterContinental Hotels Group to 5,500p from 5,800p, keeping the rating at 'outperform', following the company’s full-year results, saying its target price reduction was mostly down to FX, with the balance due to higher cash outflows.

InterContinental Hotels reported a jump in full-year profit on Tuesday but said it would not be paying out any additional capital this year as it looks to reinvest savings in growth.

In the year to the end of December 2017, operating profit rose 7% to $759m versus the consensus of $754m, while pre-tax profit was up 14.7% to $678m. Revenue edged up 4% to $1.8bn and group revenue per available room increased 2.7%. For the fourth quarter, RevPAR was up 4%.

The company lifted its dividend by 11% for the year to 104 cents and announced a series of new initiatives to build on its strategy and drive an acceleration in its growth rate.

Credit Suisse had been expecting a $500m special dividend with the results but said that it would far rather see the company invest in enhancing its long-term growth credentials with a restructuring plan to drive better allocation of the same resources. It argued that the 2.7% drop in the shares following the results was a buying opportunity, with the new target price implying 20% potential upside.

"We estimate a one-off $200m cash return (the cost of the restructuring) would be circa 1.5% earnings per share enhancing whereas the aim to match industry-leading net room growth of circa 6% should have a material compounding effect and thus create more value for shareholders."

The bank removed a $500m special dividend from its 2018 estimates but said net debt improves only around $200m due to the restructuring charges and the reversal of a system fund surplus. However, it still models $2.6bn of special dividends from 2019 to 2022, with the company committed to returning excess capital intact.

Barclays downgraded its stance home furnishings retailer Dunelm to 'equal-weight' from 'overweight' on Wednesday and slashed the price target to 630p from 810p following "disappointing" first-half results and commentary on Worldstores.

The bank said pre-tax profit of £60m was 5% below is the estimate, while the downgrade to guidance for Worldstores - which is now expected to incur a pre-tax loss of £7m to £8m for the year - is concerning.

"Although we still believe the acquisition provides Dunelm with a better online platform than it had previously, we think the process of consolidating websites and reaping the benefits of the combined businesses may be slower and more challenging than we had previously anticipated," Barclays said.

In addition, it highlighted concerns about store profitability, noting that while core Dunelm's online business has been growing well, in-store like-for-like sales have been less impressive. If this continues, it could hinder operating leverage as several store costs are relatively fixed in the medium term.

"Ultimately, we recognise the drivers of the story including store roll-out, improved online capabilities and an optically cheap valuation; but we lack confidence on execution in the near term."

The bank cut its underlying pre-tax profit estimate for 2018 to £114.5m from £122.2m and its estimate for 2019 to £128.6m from £141m. For 2020, it now sees an underlying pre-tax profit of £143.7m from £165.9m.