Broker tips: Mitie, Travis Perkins, SDL

Outsourcing and energy services company Mitie was under the cosh on Tuesday as Jefferies downgraded the stock to 'underperform' form 'hold' and cut the price target to 175p from 195p as it said accounting changes could create headwinds.

It said the shares have been volatile as the market assesses the outlook for recovered earnings and the balance sheet.

"In our view, the new CEO is taking many necessary steps to rehabilitate Mitie but risk/reward is unfavourable ahead of the KPMG accounting review," Jefferies said.

The bank said accounting is a key issue for the shares as prepayments/accrued income have expanded considerably and material accounting restatement is a major pillar of the bear case.

Jefferies said percentage of completion method accounting may have flattered group earnings before interest, taxes and amortisation by around £20m to £30m annually for the past three years, with the cash impact offset by a receivables discounting facility.

The bank cut its earnings per share estimates for FY17 and FY18 by 23% and 20%, respectively, to 13p and 16.50p. The estimates now sit 5-7% below consensus.

Travis Perkins

Analysts at Berenberg upgraded their recommendation on Travis Perkins, hailing the builders merchant's decision to invest in a heavyside distribution network.

It was the only firm in its space that did so, meaning it had the best supply chain management in the industry with a best-in-class customer proposition, they said.

The German broker upped its recommendation on the stock to 'Buy' lifting its target price to 1,800p in the process.

The anlaysts said they were 2% ahead of consensus for 2017 and 2018.

Of interest, they pointed to the experience of the firm's US peers, early adopters of supply chain best practices which "provide evidence that margins and returns should improve over time".

Lease-adjusted return on capital employed should grow by 255 basis points by 2021, Berenberg said, reaching 13.5%.

Travis Perkins was also in the midst of revamping its IT to support its multichannel offering, helping to achieve both scale and best-of.breed fulfillment for competitive differentiation.

"We forecast that online sales will reach £145m in 2021E (5% of sales) at General Merchanting; we believe this is conservative and not in consensus forecasts," they pointed out.

The 'self-help' story in the company's ailing Plumbing and Heating and Consumer arms was also intact, with a review already underway in the former, Berenberg explained.

However, in Consumer management needed to accelerate investment were LAROCE was over 25%.

Berenberg also added the shares to its high-conviction list of ALPHA stocks.

From a valuation standpoint, Travis Perkins was trading on 11.4 times' Berenberg's estimate for the outfit's 2018 earnings per share, which was towards the bottom end of the P/E range between 2013 and 2017 of 10.6 to 15.9.

SDL

Canaccord Genuity bumped up its target price on SDL as the company increases the technology content of its offering, which it delivers as a managed service.

Early results from its transformation plan were already to be seen too, it said.

Research and development spend ran at 10% of sales in fiscal year 2016, anchoring the broker's investment thesis.

Together with a high level of intellectual property, that technology was helping SDL deliver global content by combining man and machine, Canaccord said.

"We believe this model brings significant competitive advantages," analyst Paul Morland said as he bumped his target on the stock from 540p to 565p, while sticking to his 'Buy' recommendation on the shares.

Only 19% of firms have a global content operating model, Canaccord said citing research from Forrester.

"Advantages for clients that adopt a global content operating model include: better brand consistency, higher experience consistency, better compliance, more content re-use, improved customer experience, faster time-to-market and lower costs."

Regarding the transformation plan, SDL had strengthened its management team, disposed of some non-core units, diversified its client base and made good progress on sales into premium sectors.

Sixty new enterprise customers had been secured with some "world leading brands", Morland said.

"We believe that, in time, this business model will attract a higher rating for its more scalable revenues, higher gross margins and better visibility ... and as the transformation plan progresses and growth accelerates, we see further possible upside."