Broker tips: Ocado, Prudential, Shawbrook

Shares in Ocado gave up much of Tuesday's gains as further downgrades were made to forecasts for the current year by Barclays and Exane BNP Paribas.

Following an analysts meeting on the day when the online grocery facilitator's mixed interim results generated a positive share price reaction, Barclays said this bounce may have been more of a rebound after selling stemming from the Brexit result rather than any particularly positive news in the statement itself.

Indeed, the bank felt Ocado delivered no "real" new news on the long-awaited international deals and no update on the ‘in principle’ agreement with Morrison over CFC4 (Customer Fulfilment Centre 4 at Erith in Kent).

EBITDA was around 10% below Barclays' forecast and added to cost pressures, this sparked slashing cuts to earnings per share in for this and the next two years and bringing the target price down to 265p from 290p.

While the company was more specific about the opening schedule for CFC3, which is now set for autumn 2016, Barclays said Ocado’s ability to sign a technology deal with an international partner "remains the main unknown".

"Fundamentally, we think Ocado has a technology proposition that works well for customers and that could be very attractive to numerous food retailers. Whether there is a price that makes economic sense for Ocado and for a potential partner is unclear although it might make sense for Ocado to price its offer very keenly to get a credible initial partner on board," Barclays said.

Barclays said it had "only limited concern" about Amazon's growing grocery presence in the UK and maintained its 'equal weight' rating on Ocado's shares.

Exane's analysts, reiterating their 'neutral' rating, also are "not especially worried by Amazon Fresh" in the near-term.

They believe Ocado has "strategic value" as the grocery market moves online but faces tough competition conditions in the UK that is pressuring profit margins, and an major new deal is being hampered as "it seems international grocers first want to explore store-picked solutions" rather than Ocado's Smart Platform logistics-platform-as-a-service.

Exane's take is that: "the issue is that retailers would rather sweat existing assets, for now. As such, it seems Ocado would countenance signing ‘store-pick only’ international deals, on the basis retailers will upgrade to dedicated picking facilities in time. CFC3 may change retailers’ minds, but the central scenario now much more feels like international deals – and we’re still awaiting the first – will be skewed to store-picked solutions."

Exane trimmed its 2016 EPS sharply to 2.17p on the delays to CFC3 and said the continued absence of a deal and the likely shift, if only temporarily, to a lower ‘valueadd’ store-pick model, impairs international optionality. This means the target price was cut 14% to 215p.

These notes followed Societe Generale's 'sell' recommendation on Tuesday, with the French bank seeing "no reason to feel more reassured" as it still perceives a challenging market and margin trend.

SocGen expected consensus EPS could come down by at least 5% and believes AmazonFresh in the UK could expand rapidly on the back of a compelling fresh food offer and competitive pricing, which "could prove a real threat to Ocado".

Barclays reiterated an ‘overweight’ rating and target price of 1609p on Prudential, saying the insurer is a “strong high quality business and the double digit growth story is intact”.

The bank said European insurance stocks have fallen extensively but believes the recent selloff in Prudential is an opportunity to buy the “best in class insurer at an attractive valuation”.

“We view Prudential as the one true large-cap growth stock in European insurance, and the compound growth of its earnings is the tangible evidence,” Barclays said.

“Prudential is our Top Pick among European insurers.”

Barclays added that Prudential has grown operating earnings at 13% since 2004 compared to 4% at Aviva and 8% at Legal & General.

The bank noted that Prudential’s dividend increases have been “less eye-catching” than its peers but are set at a conservative level which won’t be cut in stress environments.

“Prudential has grown its dividend every year since 2004, while Aviva has cut twice and Legal once. Pru’s dividend has increased by 3.7x verus 2004, versus 1.5x at Aviva and 2.4x at Legal. The tortoise wins, particularly in uncertain times.”

Shawbrook shares surged back 23% higher on Wednesday morning, helped by comments from Credit Suisse that the reaction to the UK's vote to leave the European Union which had seen the challenger bank lose over half of its value in the three days was "overdone".

Britain's exit from the EU has been predicted to hit banks with a lower-for-longer rate environment that will hit margins, as well as the potential for reduced growth, higher impairments and lower house prices.

On top of the implications from Britain's exit from the EU, Shawbrook on Tuesday revealed it hadfound irregularities in asset finance lending and announced that its chief financial officer had resigned after four years in the role.

Credit Suisse said it believed it was an isolated case, "rather than signalling a potentially broader weakness in historical underwriting standards which could lead to further such losses in future", as Shawbrook's local asset finance sales teams had previosuly but not longer were allowed to originate loans up to £300,000 without approval from a separate credit team.

Regarding Brexit, it has been predicted that banks large and small will be hit by the lower-for-longer interest rate environment, as well as the potential for reduced growth, higher impairments and lower house prices.

After the referendum fallout and Tuesday's news, Credit Suisse acknowledged the macroeconomic risks from Brexit by cutting its estimates for customer loan compound annual growth rate for 2015-20 by five percentage points, net interest margins (NIMs) estimates by a further 30 basis points to 5.12%
from 2018, and underlying earnings cuts of cira 9%, 30% and 38% for 2016, 201 and 2018.

However Credit Suisse's new target price of 235p, down from 380p, still offers strong upside.

With interim results due on 27 July, analysts said that: "We think any fuller discussion by management about their initial thoughts and plans to cope with Brexit, as well as any further details about their lending controls, would be helpful in rebuilding investor confidence."