Broker tips: Pets at Home, Petrofac, Aldermore

Numis has initiated coverage of Pets at Home with an ‘add’ rating and target price of 256p, saying the company is a “market leader with a strong track record”.

“Despite the meaningful near-term challenges facing the business, we believe the scale, quality and visibility of the long term growth opportunity, led by the capital-light roll-out and maturity of its Services division, should support a material premium to the General Retailers,” Numis said.

The broker added that Pets at Home has grown to become the largest specialist retailer of pet food, pet products and pet-related services in the UK. The quality of its overall customer proposition has supported “solid and consistent growth” along with ongoing market share gains and a “robust” financial history, Numis said.

However, the cost inflationary pressures of the National Living Wage and foreign exchange headwinds are weighing on near-term earnings.

First half pre-tax profit grew 3.9% but would have been 8% if excluding the effects of the increase in minimum wage requirements and a weaker pound.

“Indeed, we see the longer-term structural growth drivers underpinning the Pets at Home equity story - new space, maturity, Services growth, and underlying operational leverage - as very much intact,” Numis said.

Numis believes the rollout and maturity of the Services operations as well as the opening of more stores could add an incremental £95m of earnings before interest and tax at group level, almost doubling its current pre-tax profit.

The target price represents a 44% premium to the general retail sector and underpins the ‘add’ recommendation, which Numis said it is “happy to support despite the significant near-term challenges facing the business (slower current trading, tougher consumer outlook, online competition, foreign exchange, national living wage), given the high quality longer-term opportunity”.

Canaccord Genuity on Tuesday reiterated a ‘hold’ rating on Petrofac but raised the target price to 900p from 850p.

The broker said Petrofac has an “impressive record” from its initial public offering in 2007, showing resilience through the oil industry’s 2008-09 crisis.

Petrofac’s core Middle East North Africa-CIS lump-sum engineering and construction business has performed reliably year after year, with steady profits despite swings in order intake and customer sentiment, Canaccord said.

“The group chose to diversify into a range of other activities: operations & maintenance (O&M), upstream projects, and North Sea lump-sum work; whilst its record in these investments is much better than is generally perceived (Malaysia & O&M have gone very well) there have been several high-profile misses, leading to a series of profit warnings since 2014,” Canaccord said.

“With the decision to largely exit these positions we believe the chance of further such warnings is now limited.”

Canaccord said there, however, remains some legacy issues, including its Stella project, five Mexican contracts and a part-complete construction vessel and a cancelled contract on its deepwater multi-purpose offshore vessel JSD 6000.

The group's strategy beyond this retrenchment remains an open question, Canaccord said.

“The original arguments for diversification rested on stretching Petrofac's undoubted capabilities and track record into new markets, but also on the observation that the core MENA-CIS business was unlikely to grow much further.

“We don't think much has changed: Petrofac still enjoys a c.20% market share of in those parts of that market it currently addresses.”

The broker added: “This core addressable market has grown beyond original expectations, but it is unlikely to deliver Petrofac's aspirations for revenue growth in the medium term.

“Whilst there have been some hints of the future strategy - notably going more into downstream and petrochemicals, and exploring further Asian markets - we don't as yet see a clear future path.”

Canaccord raised its earnings per share forecast by 2016 by 20% but lowered its estimate by 1% in 2017 following Petrofac’s trading update last week.

Petrofac said full year net profit is expected to be about $410m in 2016, in line with previous guidance.

"We are on track to deliver positive results in 2016 in line with guidance reflecting record revenues, solid operational performance across all of our businesses and the delivery of significant cost savings," said CEO Ayman Asfari in a statement.

Deutsche Bank upped its price target on challenger bank Aldermore to 257p from 194p as it reiterated its ‘buy’ rating on the stock.

It noted the shares are up 38% since the beginning of September amid an improved perception of the UK economy and following a better-than-expected third quarter.

“We think there is still upside from here, driven in particular by falling funding costs,” Deutsche said.

“On today’s advertised deposit rates, we estimate a flow cost of deposits of around 1%, compared with 1.8% at 1H16. We expect the majority of this benefit to flow through over the next two years, helping offset asset pricing pressure and providing Aldermore with a stronger buffer against falling margins than other UK peers.”

The bank said key downside risks include deterioration in the UK economy or market sentiment, slower loan growth, asset price compression, higher loan losses/UK recession, a material fall in house prices and higher capital requirements.