Broker tips: Safestay, Cairn Energy, Berendsen

Canaccord Genuity has cut its rating on Safestay to ‘hold’ from ‘buy’ and lowered the target price to 42p from 65p after the budget accommodation provider said 2016 was a “difficult year”.

In a pre-close trading statement, Safestay said its performance in 2016 was affected by political instability, low visitor numbers in London and terror attacks in France, but the hostel owner and operator remains confident about its outlook this year.

"This exacerbated the slow build-up in average bed rate (ABR) and occupancy in Holland Park which impacted the Group's trading performance and while substantially ahead of last year it is slightly below market expectations for 2016," it said.

The group said while it is “substantially ahead of last year it is slightly below market expectations for 2016”.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for the year is expected to be £2.2m, up from £600,000 the previous year and revenue is to be £7.4m, up from £4m.

Canaccord, which had expected EBITDA of £2.5m, said trading at Holland Park hotel has not matured as hoped in a tougher-than-expected market. The broker cut its forecasts for fiscal year 2016 to a loss per share of 0.66p from a LPS of 0.05p. For 2017, it lowered its estimate to earnings per share of 0.74p from EPS of 0.86p.

“Holland Park opened in summer 2015 with a soft launch and it has taken longer than expected to build the group business due to softer trading conditions post the Paris terrorist atrocity,” Canaccord said.

“As a consequence, Safestay has turned to lower-yield transient business to keep the hostel busy. Safestay completed a minor rooms configuration in autumn 2016 and advance bookings are considerably better than last year. Elsewhere trading continues to be satisfactory.”

Safestay is making “good progress” with the extension of its Elephant and Castle hostel in London which is expected to be complete in time for summer 2017.

The project will add 80 rooms and will improve the food and beverage offering.

“The planned rooms will be smaller which should command a higher premium,” Canaccord said. “We calculate the development should generate another £500k of room revenue and £75k of ancillary revenue using existing assumptions for fiscal year 2018 with an 85% room revenue conversion to EBIT.”

Deutsche Bank has upgraded Cairn Energy to ‘buy’ from ‘hold’ and nudged the price target up to 275p from 270p following a review of the company’s development portfolio and on its potential to outperform market expectations.

The bank said it sees upside potential on Kraken and is positive on the Catcher development, where the wells have so far responded well to water injection testing.

In addition, it reckons Cairn can de-risk its Senegal SNE discovery through well interference testing in the summer.

“Taken together with a robust balance sheet and an option on the Cairn India tax arbitration, we think Cairn offers investors several potential catalysts for valuation growth this year.”

Deutsche noted Cairn has made good progress on its UK developments over the last 12 months, with both projects below budget and on schedule for a 2017 start-up.

The Kraken floating production storage and offloading vessel is currently in Rotterdam for inspection and certification and start-up is still guided for the second quarter.

Meanwhile, the operator of the Catcher project is also highly incentivised to complete work on the FPSO at the yard ahead of sailing.

“Both vessels benefit from a less complex hook-up to the risers using the buoy method, which should limit time lost to bad weather.

“As our special report on reservoir performance outlines today, both projects will then rely on secondary recovery through water injection to maximise recovery. We think the risk/reward is attractive, particularly on the Catcher development.”

Commercial laundry group Berendsen got a boost as RBC Capital Markets upgraded the stock to ‘outperform’ from ‘sector perform’ and lifted the price target to 950p from 900p.

The bank acknowledged risks around the UK turnaround and execution of the chief executive’s strategy, but said Berendsen is fundamentally a good business and the valuation now discounts these downside risks.

“We believe the UK is in the price for nothing and the dividend and balance sheet are supportive,” it said.

RBC noted the UK only now accounts for 15% of forecast group profits, adding that forecasts are now very conservative. For instance, RBC estimates only £6m UK flat-linen profits in 2017E - another leg down from £10m in 16E.

It said the UK operational issues will take time to resolve and the solution will require plant investment.

“There is some risk of further disruption and customer service issues, and management has to be careful not to destroy the strong local relationships by making too much change too quickly. We expect detailed turnaround plans at FY results on 3 March. However, the group continues to have strong market positions in what is a capital-intensive business, where scale matters and improvements should hence be achievable over time.”

In addition, RBC pointed out that the European business looks in good shape and has not been hit by under-investment issues. This is positive for mix, given margins are significantly higher than in the UK at 20% versus 7%.

“The overall outlook looks positive given relatively robust GDP and potential for further outsourcing. Market positions are strong in Scandinavia and Benelux, and in Germany growth should remain strong as Berendsen takes share from smaller players, with the potential to further consolidate the market. It may also benefit from some fallout from the Rentokil/Haniel link-up.”