Broker tips: Softcat, Ferguson, Ocado

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Sharecast News | 21 Mar, 2018

Credit Suisse downgraded its stance on IT infrastructure products and services provider Softcat on Wednesday on valuation grounds, saying the shares were "up with positive events".

CS cut the stock to 'neutral' from 'outperform' but lifted the price target to 700p from 600p following the company's "very strong" interim results earlier in the day.

The bank said all metrics look good, with broad-based contributors to growth, strong cash flow and a strong outlook. As a result, it upped its FY18 and FY19 earnings per share estimates by 4-5%, taking it towards consensus that upgraded on the back of the period-end update.

"We have no operational concerns, but we believe the share price now reflects this positive outlook. Softcat now has broadly the same market cap as Computacenter and yet to December 18, we forecast operating profit of £60m for Softcat and £105m for Computacenter.

"We believe this highlights the future growth that is already reflected in the Softcat valuation. On valuation grounds alone, we downgrade our rating."

Softcat said earlier that in the six months to the end of January 2018, operating profit was up 15.4% to £24.1m on revenue of £472.8m, up 25% from the same period a year ago, with double-digit growth across all business lines and customer segments.

In a separate note, Credit Suisse cut its price target on plumbing and heating supplier Ferguson, formerly Wolseley, but kept its 'outperform' rating on the stock.

The bank chopped the price target to 6,280p from 6,500 given the year-to-date weakening of the USD/GBP rate but reiterated its 'outperform' rating as fundamentals are still solid. It also lifted its group organic growth estimates for the next three years, pointing to a better demand outlook.

CS said the rating was based on three key factors. The first is that the Leading Indicator of Remodeling Activity and Dodge Momentum Index point to ongoing strength in both the residential and non-residential repair, maintenance and improvement markets over the balance of calendar 2018, supported by earnings reports of key US peers.

The second is that it estimates the positive delta in commodity prices supports circa one-third of its projected EBITA growth for FY18E, significantly underpinning earnings per share estimates and providing an opportunity for reinvestment.

Thirdly, CS said that rising fixed rate mortgage rates in the US are not historically mutually incompatible with share price outperformance of RMI stocks and growth stocks like Ferguson can outperform when bond yields rise in late-cycle bull markets, aided by offsetting tax cuts and an improved employment outlook in the US.

The bank said it continues to believe that the group trades at an unjustifiably large discount to the US peer group, given the strength of Ferguson's market position and balance sheet.

Goldman Sachs downgraded its stance on Ocado to 'neutral' and removed the stock from its Conviction List following "material" outperformance.

GS noted the share price has risen around 135% since Ocado announced its agreements with France's Casino last November and Canadian food retailer Sobeys in January to provide them with its end-to-end grocery solution, Ocado Smart Platform.

Since being added to the Conviction List in May 2014, the stock is up 79% versus the FTSE World Europe up 20%, the bank said. Since being added to the buy list in October 2013, the stock is up 34% versus the FTSE World Europe up 26, with no upside remaining to Goldman's unchanged 540p 12-month price target.

"While we believe there is a material opportunity for Ocado in the online grocery space, our target price already includes seven further OSP deals to be signed over the next 10 years of a similar size to those two.

"Thus, over the next 12 months, we see material upside only through the announcement of an agreement with a major grocer that could demand far more OSP capacity than we forecast, or a takeover bid - neither of which we have visibility on."

Goldman said its price target assumes UK retail revenues increase from £1.3bn in 2017 to £7bn in 2030.

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