Broker tips: Standard Life, Essentra, William Hill

UBS downgraded Standard Life to ‘sell’ from ‘neutral’ and lowered its price target to 310p from 320p on expected earnings pressures from increased outflows from Standard Life Investments.

The Swiss bank changed its rating on its expectation that earnings pressure will emerge in 2017 on SLI due to increased asset outflows from its flagship £42bn Global Absolute Return Strategies (GARS) fund, which is sold on its aim to provide positive investment returns in all market conditions over the medium to long term.

The insurer’s share performance is strongly linked to flows and performance of GARS but the fourth quarter of 2016 is estimated to see net outflows increase to around £3bn (including a large UK outflow) compared to the £1.5bn the the third quarter last year.

According to UBS analysts GARS outflows are being particularly caused by structural trends that will be difficult to reverse at least in the near-term.

This includes current performance below its benchmark, fund size constraining scope for longer-term investment outperformance, pension consultants putting the fund on ‘watch’ and risks to industry multi-asset flows which could fall toward 2013 levels potentially.

The total forecasted multi-asset outflows are £3.9bn for the full year 2016 and £6bn over the full year 2017 resulting in earnings growth of 4%, which is half that of consensus. The bank expects good progress on costs but feels falling revenue will put pressure on ratios.

UBS is however positive on asset growth of 8% per annum to 2018 for UK Life and that the company’s 24.1% stake in merged HDFC Life and Max Life could be a source of upside over the medium term.

The earnings per share estimates for 2017 fell by 9% to 27.28p.

Citigroup downgraded Essentra to ‘neutral’ from ‘buy’ and cut the price target to 430p from 500p following the company’s third profit warning in the space of a year on Monday.

The maker of cigarette filters and plastic packaging cautioned that it expects profit to be below expectations due to operational issues at its health and personal care packaging unit.

For the 2016 calendar year, it expects operating profit to be at the bottom of or modestly below its previous guidance of £137m-£142m. The company said that due to continuing operational issues in the Health & Personal Care Packaging unit, there was a further “significant” decline in revenue and profitability during the last two months of 2016, and there is no expectation of a near-term improvement in 2017.

Citigroup cut its earnings per share forecast for FY16 by 4%, for FY17 by 22% and FY18 by 21% as it incorporates further margin erosion. The bank now expects profit to drop to £12.9m in the second half of 2016 from £22.1m in the first half.

Citi said that in FY17, further measures will need to be taken to stabilise costs at underperforming sites and improve service levels to re-ignite sales. While these measures are being taken, it expects H&PC margins will remain depressed, declining to 6.5% in FY17 from 13.6% in FY15.”

“Following successive earnings downgrades in 2016, the shares are trading at a steep valuation discount to both historic averages and the broader FTSE 250.

"Despite the valuation support, Essentra is experiencing operational challenges, which we assume will limit earnings recovery in FY17e. We do not expect near-term catalysts to emerge until the company re-defines its strategic direction under new CEO, Paul Forman, who began 1 January 2017.”

UBS downgraded William Hill to ‘sell’ from ‘neutral’ and cut the price target to 240p from 295p, saying the market has not priced in the fixed odds betting terminal risk for the bookmaker.

UBS reckons the market is pricing in either no downside risk to Retail earnings before interest and taxes or a multiple for the Online business which it views as stretched given Online key performance indicators and the latest app download trends from its UBS Evidence Lab study.

The bank has cut its valuation multiple for the Retail business from 8x to 5x EBITDA to reflect the regulatory risk, and this drives the target price cut and rating downgrade.

“With increasing regulation and volatility of sports results, coupled with current valuations, we believe it prudent to have a neutral exposure to the sector with clear preference for Ladbrokes Coral,” UBS said.

UBS said data shows that for William Hill in the UK, the share of app downloads has fallen from 22% in the first half of 2014 to just 10% in the second half of 2016.

The bank said it continues to prefer Ladbrokes Coral, which it rates at ‘buy’.

“We see LCL as having more regulatory risk priced in, while the WMH shares fail to reflect this risk, and our data suggests WMH Online will not show a significant recovery in the near term.”