Broker tips: TalkTalk, Superdry, Inchcape

Barclays initiated coverage on automotive dealer Inchcape on Thursday, issuing the London-based firm with an 'underweight' rating and a target price almost 20p lower than its current trading amount.

Barclays said that while Inchcape had been focussed on trying to shift its profit pool to higher-growth markets - these things take time, and with hits expected to come from its declining Singaporean market share and FX fluctuations, the leisure and consumer analysts suggested the likes of Greencore or Bakkavor offered higher returns.

Along with the underweight rating, Barclays issued Inchcape with a target price of 695p, below its closing price overnight of 724.5p.

Inchcape was seen as being at the at the top of its "feast or famine" certificate of entitlement cycle, the Singapore government's programme designed to limit car ownership and the number of vehicles on the country's roads. This led Barclays to project declines in new car sales on the lion island with EBITDA to decline by as much as 60%, as had happened between 2008 and 2012, plus an impact of strengthening sterling in recent months.

The bank also pointed to Inchcape's £1.6bn inventory, 60% of which had been financed with short-term loans reported in trades payable as opposed to debt as being a mid-term concern for the group and global declines in consumer sentiment when it came to the purchase of new auto-vehicles as a more long-term hassle.

JPMorgan Cazenove initiated coverage of fashion brand Superdry on Thursday at ‘overweight’ with a 2,170p price target, highlighting its global appeal.

The bank said that the brand’s e-commerce relevance, strong digital and social marketing strategies and a global omnichannel platform are real assets, underpinning growth across all channels, with opportunities to further expand across categories such as womenswear and sport and geographies.

“The group has, in our view, fully embraced the future of retailing and is well ahead of the curve in having e-commerce relevance, a modern and efficient omnichannel infrastructure and the skillset and capabilities required to communicate with consumers in-store and online. We see Superdry’s focus on digital and advanced use of technology as key enablers to winning with digitally enabled consumers.”

In addition, it reckoned the company will be able to increase cash generation and grow net cash, giving the basis for further cash to be returned to shareholders, expecting return on capital employed to improve from 25% in FY17 to 30% in FY20 and for free cash flow to more than triple to £77.7m in FY20.

It pointed out that following the company’s first store opening in London in 2004, it is now present across 148 countries. “We believe the brand resonates well with the growing millennial population and remains well positioned to further expand across countries and product categories.”

Analysts at RBC Capital Markets upgraded its rating on telecom provider TalkTalk to 'outperform' on Thursday, saying that while not without issues, they believed concerns over the firm's balance sheet seemed to be overdone.

RBC stated that with TalkTalk's revenues on the mend thanks to an uptick in subscribers in the fourth-quarter due to a solid adoption rate of its fixed low-price plans (FLPP), its analysts anticipated a top-line revenue growth from the firm of around 1.4% in 2019, before total revenue began to accelerate at a rate of around 2.7% in its 2020 trading year.

In terms of target price, RBC said, "We lower our price target from 190p to 150p. The change is mainly driven by a more conservative assumption on TalkTalk's corporate business. We had previously valued this at 14x EBITDA, in line with Gamma, and lower this to 10x. We also lower our estimates, factoring in a more conservative ARPU estimate."

The analysts highlighted Ofcom's proposed 40mbps fibre price, due to be implemented before 1 April, as another potential saviour to TalkTalk's squeezed margins. Saving the group as much as £50m by 2021.

"The balance sheet, whilst stretched, is not in danger, in our view. Peak leverage is at 3.1x in FY2018, comfortably below covenants at 4.0x," the report read.