Broker tips: Moneysupermarket, McBride, Rentokil

Moneysupermarket.com Group was upgraded to a ‘buy’ rating from ‘hold’ but had its target price cut to 325p from 352p on Monday by Canaccord Genuity ahead of the company’s trading update later in the week.

Canaccord said it expects the financial services price comparison website to confirm it is on track to reach full year 2016 forecasts in Thursday’s trading update.

The broker estimates a 7% increase in first half group revenue, driven by strong momentum in Money and Home Service. Margins, however, are likely to be held back by the previously-flagged step up in marketing spend, Canaccord said.

The Travel section, which represents 8% of group revenue, is expected to be lacklustre due to the impact from a weaker pound and softening consumer spending.

While the company’s shares have fallen 18% since Britain voted to leave the European Union on 23 June, Canaccord believes price comparison platforms “should be relatively recession resistant” as customers will want to use the website to save money in a downturn.

“It has some exposure to supply of credit products (around 18% of group revenues), which might be impacted by a recession,” said Canaccord’s Simon Davies.

“But much of this relates to balance transfers, and demand should remain resilient, as should insurance activity.”

He added: “Moneysupermarket has been significantly de-rated, and now trades on a 2017 price to earnings (PER) ratio of 15.6x (or 15.0x ex-cash) and enterprise value (EV)/EBITDA of 10.3x, backed by a dividend yield of 4.0% - and with £78m of projected 2017year end net cash, the risk to the dividend is upward (through a potential special divident).

“We nudge down our target price to reflect downgrades/relative valuations, cutting from 352p to 325p. But this offers potential 32% upside, putting the shares on a 20.0x ex-cash PER, EV/ EBITDA of 13.5x (vs UK digital media peers in 14x to 18x range) and yield of 3.0%.”

McBride’s shares rose on Monday after Numis raised its rating on the stock to ‘buy’ from ‘hold’ and lifted its target price to 191p from 183p.

The maker of retailer own brand household and personal care goods said in a trading update on Monday that it expects full year adjusted operating profit will be slightly ahead of its previous estimate.

The group said it has benefitted from cost saving initiatives, including the restructuring of the UK business.

However, the company sees full year sales lower by about £6m as a result of its decision to cut back on the number of small customers it serves.

McBride said revenues also continued to be affected by ongoing price pressures in a number of key markets, especially in the UK where the pound has plunged.

“Consequently, on a constant currency basis, group revenues for the year ended 30 June 2016 were 1.9% lower than the prior year," it said in a statement.

McBride added that there has been no impact to date on the group's day-to-day operations from the outcome of the UK's EU referendum on 24 June. The firm said it “remains too early to determine the longer-term effects on McBride's activities, of which approximately 70% are in subsidiaries based outside the UK”.

The company said its ‘Manufacturing our Future’ strategy, through the three-stage ‘Repair, Prepare, Grow’ implementation plan was on track.

Numis said the update was “solid with the radical simplification programme on track, epitomised by how McBride commenced this full year with only 150 (versus 600) customers”.

Things were still looking up for Rentokil despite the strong run which the shares had enjoyed year-to-date, which had seen them outperform the Footsie by 23%, analysts at RBC said.

Following recent movements in foreign exchange markets and acquistions by the company the broker bumped up its estimates for the company´s earning per share in 2016 and 2017 by 3.0% and 6.0%, respectively.

The rate of growth in organic revenues would be slightly lower over the three months to June than the 6.4% clip reported for the first quarter, analysts Andrew Brooke said in a research report published on 11 June.

Nevertheless, Brooke expected the other main trends at the pest control specialist to be unchanged.

He also expected confirmation that the synergies arising from the purchase of Steritech were on track.

Brooke highlighted five aspects of the company: Its potential for organic growth, signicant potential to continue growing its margins, improving mix, possible corporate actions and the firm´s sensible strategy.

More specifically, the analyst saw potential for Rentokill to improve its margins by more than 300 basis points over the next five years.

The same analyst also believed that there remained "significant scope" for mergers and acquisitions, "which should help drive customer density. In addition, we would not rule out a sale of Workwear at some point."

Following on from all of the above, he lifted his target price from 220p to 240p and said the shares remained a 'top-pick'.