Broker tips: Ultra Electronics, Mondi, Just Eat

JP Morgan has downgraded Ultra Electronics to ‘neutral’, citing a reduced outlook for 2018 earnings and increased competition for providing sonobuoys to the US Navy.

Ultra’s 2017 results, posted a day earlier, were in line with expectations but there was “a lot of info to digest”, the JP Morgan analysts said.

Earnings for 2018 are likely to be about 6% lower than JP Morgan’s forecast due to an accounting change, currency fluctuations and higher research costs. Ultra also said its acquisition of US rival Sparton was blocked on competition grounds.

Ultra and Sparton have a joint venture that sells sonobuoys to the US Navy. The US Department of Justice has announced an investigation into the joint venture and the navy has said it wants more competition for its purchases of sonobuoys.

Sonobuoys make up about 15% of Ultra’s group sales and the US Navy contract is a core part of the company’s business, the analysts said.

The analysts reduced their December 2018 price target for Ultra’s shares to 1,535p from 1,675p, reflecting lower earnings and a slightly lower target multiple due to the prospect of increased competition to sell the US Navy sonobuoys.

“Given our lower price target, and the rally in the shares from recent lows, we downgrade to 'neutral' from ‘overweight’, the analysts said.

Mondi, which announced a bumper special dividend last week, rose on Tuesday as news that Smurfit Kappa has rejected a takeover proposal from International Paper and an upgrade by Credit Suisse provided a boost.

CS upped the stock to 'outperform' from 'neutral' and lifted the price target to 2,345p from 2,220p, saying that it's attractively priced. It noted the shares have basically flat-lined over the last 12 months, while earnings prospects and valuation metrics have improved materially.

The bank bumped up it 2018 earnings per share forecast by 6% and its estimate for 2019 by 7%, and introduced a 2020 EPS estimate of €1.89.

Mondi, which announced a bumper special dividend last week, rose on Tuesday as news that Smurfit Kappa has rejected a takeover proposal from International Paper and an upgrade by Credit Suisse provided a boost.

CS upped the stock to 'outperform' from 'neutral' and lifted the price target to 2,345p from 2,220p, saying that it's attractively priced. It noted the shares have basically flat-lined over the last 12 months, while earnings prospects and valuation metrics have improved materially.

Analysts also remained fairly confident in backing Just Eat's shares but while results were ahead of consensus expectations, management guidance for 2018 profits was significantly below consensus.

Guidance for 2018 was for £165-185m of underlying earnings before interest, tax, depreciation and amortisation, which implies a 19-27% downgrade to consensus, said RBC Capital Markets.

Management guided for revenues of £660-700m, the mid-point of which is 1% ahead of consensus, but underlying EBITDA was lower than the consensus at £227m as investment was increased due to intensifying competition in certain markets.

"Just Eat is attractively positioned, in our view, enjoying a leading position in all of its markets and should sustain high levels of growth. We see potential upside to revenue expectations, although believe investments in own delivery to weigh on share price performance near-term," RBC said. RBC kept its 'sector perform' rating, with a target price of 840p.

Canaccord Genuity said EBITDA guidance was "disappointing" in light of another year of significant investment.

"£50m is a really big hike in investment. This is the second time JE has done something like this. The first time (post 2017 interims), the market reacted negatively and then shrugged it off. We expect a similar reaction again."

Canaccord sees international territories becoming a material source of profits over the next few years, with established market revenue nearly doubled to £148m, but investment reducing EBITDA 12% to £12m. Developing markets also recorded rapid growth and a decline in EBITDA losses to £4m.

Analysts at Numis said as a consequence of the new guidance being 23% below consensus at the midpoint, they would put their recommendation under review, "until we get comfortable with the economics of the delivery model".