Broker tips: Royal Mail, Dunelm, Schroders

JP Morgan Cazenove cut its price target for Royal Mail shares as it shares the market's newfound caution on the UK consumer outlook.

But Cazeove, which kept its 'overweight' rating, sees the postal operator as "partially shielded" by the ongoing growth in e-commerce and an apparent moderating in Amazon's in-sourcing and reduction in export volume pressures in light of the weaker pound.

"In UK parcels, the market is skewed toward lighter average weights (up to 2kg) - the sweet spot for RMG’s core network with larger items served by Parcelforce.

"We believe these factors, along with stronger account and tracked product growth, underpinned RMG's decision to upgrade its addressable market growth outlook in May."

Analysts at Deutsche Bank lowered their target price on shares of Dunelm after factoring-in reduced profit guidance from management and on expectations that its recent acquisition, WorldStores, would take longer to reach break-even.

In its fourth quarter trading update on 7 July, the home furnishings retailer lowered its guidance for fiscal year 2017 profits before tax to a range of between £109.0m and £111.0m.

It also posted sales of £22.5m for its WorldStores unit, which was below the prior quarter result and the £24.5m which analysts at the broker had penciled in.

Furthermore, not only were WorldStore's losses running towards the top end of management's forecasts, Dunelm also flagged £7.0m of exceptional charges for fiscal year 2017, which was on top of £17.0m of such items for fiscal year 2017, the analysts added.

Combined with the tamer trajectory now expected for WorldStores, the downwardly revised guidance led Deutsche Bank to also mark down its forecasts for profits in fiscal year 2018 as well as its cash flow forecasts on expectations for higher inventories.

For both of those reasons Deutsche also lowered its PBT for outer years by between 4% and 5%.

It also took account of the now £43.0m higher net debt and lowered its forecast for Dunelm's terminal EBIT margins from 14% to 12.5%.

As a result, Deutsche Bank lowered its target price for Dunelm from 730.0p to 665.0p.

Asset manager Schroders got a boost on Monday as RBC Capital Markets upgraded the stock to 'outperform' from 'sector perform' and lifted the price target to 3,400p from 3,300p ahead of its first-half results on 27 July.

RBC said it reckons the focus should be on profitability rather than net flows, which include a significant one-off redemption. It argued that while Schroders suffered a significant one-off redemption of £5.8bn last quarter from the internalisation of a low-margin intermediary investment mandate, the underlying business is in good shape and continues to attract flows.

It noted the shares are up only 5% year-to-date versus the sector up 17%.

"Combined with a considerable short position in the company of around 10%, we believe current levels represent an attractive entry level to a quality, diversified and global company, with a best-in-class balance sheet (and M&A optionality) as well as a credible and accomplished management team."