Broker tips: Mothercare, Man Group, Poundland

Berenberg downgraded Mothercare to ‘sell’ from ‘hold’ and slashed the price target to 130p from 250p following the company’s update on Thursday.

The bank said the fourth quarter trading statement was downbeat, highlighting a material slowdown in the international division.

In the 11 week period to 26 March, International retail sales were down 9.7% at constant currency, with sales in actual currency down 10.8%, Mothercare said on Thursday.

“We have been cautious about the name since our initiation, but had believed that the International division would provide something of a solid backbone around which the rebuilt UK business could start to contribute.”

However, Berenberg said that although the UK business has shown some improvement in the past year, it is still loss-making.

Amid a deteriorating outlook for the International business, the bank cuts its full year 2016/17 and 2017/18 earnings per share numbers by 32% and 34%, respectively.

It expects earnings before interest and tax in the International business to go backwards and now forecasts £34.5m EBIT in 2016/17 versus £45.9m in 2014/15.

“We believe restructuring the assets will continue to come with a greater-than -average risk and, as such, downgrade our recommendation.”

Shares in Man Group are significantly undervalued, analysts at Shore Capital argued following the company’s first quarter update.

Contrary to what one might expect, in a quarter pockmarked by volatility the fund manager saw net inflows rise by $0.5bn, helping to keep its total assets under management on an even keel as of 31 March, at $78.6bn.

The performance of its AHL fund was particularly striking, with Quant Alternatives seeing “good” net inflows of $1.3bn (8.0%) and an excellent investment performance of +5% in a volatile quarter, “conditions not usually helpful to trend-following strategies”, ShoreCap analyst Paul McGinnis said in a research note sent to clients.

Nevertheless, a difficult first quarter did leave the fund manager nursing losses of 16.3% on its Japan Core Alpha product, versus a 12.0% fall for Tokyo’s benchmark Topix index.

Trading on 10.9 times ShoreCap’s earnings per share estimate for 2016 of 19.8c and sporting a 4.7% dividend yield, the company was changing hands at about a 20.0% discount to the sector.

That “[discount] materially undervalues […] and we think it should trade at a sector premium,” McGinnis said, sticking by his ‘buy’ recommendation and fair value estimate of 245p.

His peers at RBC were a bit more circumspect in their appraisal of the company’s solidness; hence their recommendation was held at a ‘sector perform’.

“Man’s efforts to diversify its product range and broaden its distribution network has resulted in net inflows during a volatile and uncertain Q1

“Man remains the most inexpensive asset manager that we cover and trades at 9.1x 2017E EPS (sector: 14.1x) and at 6.4x 2017E EBITDA (sector: 9.8x), largely because of the large proportion of performance fees that it derives and the lower visibility over net inflows,” RBC said.

HSBC downgraded Poundland to 'hold' from 'buy' and slashed its target price to 160p from 290p after disappointingly slow growth in core trading with no recovery expected until the second half of 2017.

In a trading update on Thursday the discount retailer said it was on track to meet full year profit expectations despite a difficult second half where like-for-like sales fell 4.9%.

The FTSE 250 company said it has been a tough quarter for its core business, which was impacted by difficult market conditions and disruption from the accelerated pace of delivery of the 99p Stores' conversion programme after their acquisition in September.

With the quarterly sales short of its forecasts, HSBC cut its forecasts for underlying profit before tax by 8-15% for the current year and the subsequent two, given 5-6% lower sales and operational gearing impacts.

The bank was reassured by management's continued confidence that the company will generate “at least £25m incremental EBITDA” from 99p Stores.

However, HSBC said the weak core trading was a concern.

"In our view, the distraction of integrating 99p Stores is a legitimate reason for lost focus on the core. However, the extent and duration of this is a surprise and momentum appears to have deteriorated, with no improvement in 4Q despite materially easier comparatives and little prospect of near-term relief."

Planned store openings have also been curtailed to 30-40 for the new financial year, with management anticipating a return towards the historical run rate of 60 once the 99p integration is complete.

HSBC's analysts were also concerned that the investment to stabilise 99p Stores has proved a major drag on cash flow, sending the business to a net debt position.

"While some of this is working capital driven and should reverse, the business has historically strived to maintain a net cash position. Moving into net debt, given the lack of core momentum and operational gearing, is a step up in the risk profile."