Broker tips: Telecom plus, Jimmy Choo, Rolls Royce

Utility group Telecom plus was upgraded to ‘sector perform’ from ‘underperform’ and had its target price raised to 1,050p from 850p by RBC Capital Markets on Friday.

RBC said it believes the company, which supplies gas, electricity, landline, broadband and mobile services, will see its price competitiveness improving over coming months due to recent rebound in energy prices.

“We increase earnings per share by 5-10% in 2019 and 2020, on stronger service growth.”

Telecom plus’s most common tariff remains 40% more expensive than the cheapest on the market, RBC noted. The uncompetitive energy tariffs stems from the terms of a 20-year supply contract the firm signed with Npower in 2013. The contract allows Telecom plus to purchase gas and electricity at a 14.5% discount to the average Standard Variable Tariff (SVT) but the company has to fund some metering and operational costs.

“Due to the recent bounce in commodity prices we believe the premium between the average SVT and the leading fixed price tariff in the market could fall 35% (or £130) to £220 in the next three months.

“This drop reflects lower commodity costs for avg. SVTs hedged over 18 months, but higher commodity costs for fixed tariffs which have no hedge. Today TEP’s cheapest tariff, 'Double Gold – Fixed', is 27% (or £217) more expensive than the cheapest on the market, but by Q4 2016 we believe it could be ~11% (or £90) more expensive. This change in pricing should help TEP’s Partners more easily sell TEP’s energy tariffs.”

HSBC maintained its ‘buy’ rating on Jimmy Choo on Friday, after the luxury shoe maker said it was off to a good start to the year.

In Jimmy Choo’s 15 June trading update, it said had been trading in line with expectations so far this year despite tough trading conditions.

The group added that it expected a pick-up in margins and good cash generation on the back of improved operating efficiency.

“We believe this statement proves that the Jimmy Choo story is fundamentally unchanged,” said HSBC.

“Besides, Jimmy Choo is among the very few names which will benefit from the further weakening of the GBP, however, as we outlined in our June 16 Brexit Deluxe report, Brexit will certainly weigh on the high end consumer psyche which has not yet recovered from previous shocks and Jimmy Choo should remain resilient but not immune.”

A weaker pound is expected to boost full year 2016 earnings. HSBC estimates EBITDA of £62m, up from £51m the previous year. The bank has forecast 2016 sales of £368m, up 16% reported and 6% at constant foreign exchange with retail up 7%.

However, HSBC cut its full year 2016-17 earnings per share estimates by 4-6% due to a higher tax rate.

The bank also slashed Jimmy Choo’s target price to 140p from 165p due to higher weighted average cost of capital.

Rolls Royce's revenues were set to grow more slowly in the short-term but the drop in sterling´s value was set to give the manufacturer´s bottom-line a big boost over the short-to-medium term, analysts at Credit Suisse said.

Following an analysis of the trends in parking and retirement of aircraft powered by the company´s engines, the Swiss broker said revenues in 2016 and 2017 would increase by 100 and 200 basis points less than it had previously anticipated.

Among the trends mentioned in the report was the recent 42% jump in the number of parked aircraft that used the firm´s engines over the past 18 months, versus a flat parking rate for the overall fleet.

That trend would continue for the Trent 500 turbines (used in the A340) and the Trent 800 series (Boeing 777), although the Trent 700 would obtain some relief from the A330, the Swiss broker said.

Older platforms, such as the RB211s (747, 767) and Trent 500s (A340), were also set to be retired at a worse pace than its peers, analysts Olivier Brochet and Ashlee Ramanathan said in a research report sent to clients on 1 July. Brexit might add to this retirement risk, they added.

The business jet segment was also under pressure, adding to the problems in Rolls Royce´s civil aerospace division, they said.

Credit Suisse also adjusted its forecast for original equipment and aftermarket downwards.

For the first half of 2016, the analysts projected PBIT of £14m (versus £456m last year) together with a cash outflow of £1.04bn.

Nonetheless, the drop in sterling´s value versus the US dollar and the single currency (USD/GBP assumption moving from 1.45 to 1.35, and EUR/GBP from 1.30 to 1.20) saw their estimates for the company´s profits before interest and taxes boosted by 9%, 12%, 14% over 2016 to 2018.

Hence, their target price - based on a 2018 sum-of-the-parts valuation - on the shares was lifted from 543p to 590p.

Brochet and Ramanathan stuck to their 'underperform' recommendation.