Broker tips: Pearson, Inmarsat, Intercontinental Hotels

Liberum said Pearson's major profit warning and accelerated plans to recover from the US higher education challenges to protect the dividend were "too little, too late".

The FTSE 100-listed company said it intended to exit from its 47% stake in Penguin Random House to beef up its balance sheet, announced it is expanding its US higher education rental offering and, "for the first time", Liberum said, explicitly recognised the structural problems in their US higher education market.

Pearson said it still expected to make £630 adjusted operating profits, but for 2017 guidance for adjusted EPS was slashed to 48.5p-55.5p, far below consensus 63.5p.

The broker felt the "key point" was that US higher education courseware fell 30% yoy in the fourth quarter and 18% for full year, estimating US higher ed is roughly 45% of profits.

"Our main area of concern has always been PSON’s US Higher Education business and that students were no longer paying for expensive textbooks and moving to cheaper options, particularly book rentals," analysts wrote.

"This has now proven to be the case (despite Pearson citing inventory issues, which may be another way of explaining the problem) but it has taken PSON management several years to publicly accept the impact.

Analyst Ian Whittaker said reducing e-book rental prices by 50% might not be enough to take share and, as has been seen in the music industry, "there is a question of association for students between the publishers’ title and the book they want to buy", while the new rental plan may put Pearson at odds with their important bookseller customers.

With the monetisation of PRH leading to significant earnings dilution, Liberum's 'sell' rating and 470p target price since last year were looking ever more prescient.

JPMorgan Cazenove downgraded Inmarsat to ‘neutral’ from ‘overweight’ and cut the price target to 830p from 950p.

JPM said its buy case had been predicated on the belief that GX will unlock new revenue opportunities, and underpin a double digit earnings before interest, taxes and depreciation growth outlook.

“Whilst we remain confident in this mid-term thesis, the near-term story seems clouded by ongoing legacy pressures, a slower-than-hoped ramp-up in Aviation revenues and rising GX/aviation investment needs.”

As a result, JPM’s 2017E EBITDA estimate is now 8% below consensus and its 2018 revenue forecast is marginally below guidance.

“These overhangs lead us to move to neutral; however, we argue that once expectations rebase, investors may once again be drawn to Inmarsat’s (still) enviable growth story and its now de-rated valuation.”

Inmarsat is due to release its fourth-quarter results and full-year 2017 outlook in March and JPM expects management to refrain from providing any new mid-term revenue guidance.

HSBC on Wednesday upgraded InterContinental Hotels to ‘hold’ from ‘sell’ and lifted the target price to 3,700p from 2,900p.

With macro-economic indicators improving, HSBC said it is “more optimistic” about global revenue per available room (RevPAR) trends in key markets such as the US, France, and the UK.

Purchasing mangers’ index data across the globe is stronger, US economic growth has picked up and HSBC economists have raised developed market forecasts, the bank noted.

“With this improving backdrop and easier comparatives in 2017, we see upside versus expectations for all hotels in our coverage,” HSBC said.

HSBC expects IHG’s US business, which has been slowing for a number of quarters, to see RevPAR growth improve to over 2% in the fourth quarter from 1.4% in the third quarter. Fiscal year 2017 will benefit from the strengthening macro-economic conditions, improving oil markets, and easy comparatives.

The US hotel business may also benefit from US President-elect Donald Trump’s infrastructure plans. IHG has a “buoyant” construction pipeline for the expansion of hotel rooms, HSBC said.

“For IHG, we think the market expectation of around 2.4% group RevPAR growth in 2017 is well underpinned,” the bank added.

The strong US dollar against the pound also provides a tailwind. IHG’s headquarters are based in the UK, which HSBC said means 50% of gross central overhead and 40% of European regional overheads are incurred in sterling, providing a boost to numbers.

“Furthermore, 70% of IHG’s debt is sterling-denominated, meaning the target net debt/EBITDA of 2.5x leaves scope for around $300m of cash return.”