Broker tips: B&M European Value, McColl's, Centrica

B&M European Value has “reached an inflection point” for sales, reckons RBC Capital Markets, upgrading the discounter on Friday.

RBC, which made the stock its ‘top pick’ with a price target kept at 400p, said B&M should see better like-for-like sales growth in the fourth quarter and next year.

A survey among 500 shoppers indicated positive consumer trends for the B&M’s UK business, less so for those in Germany and France, but the Frozen and International business are seen as good prospects for medium-term growth.

Germany’s Jawoll had a challenging year but an increase in unified sourcing and better ranges “should drive sales and reduce markdowns next year”.

But as the UK, comprised of B&M and frozen and chilled specialist Heron, accounts for around 90% of group sales and almost all of the group's profit, continued space rollout and positive UK LFL sales “should be supportive for earnings”.

Once the Bedford UK distribution centre opens in early 2020, B&M will be able to further roll out its frozen concepts into B&M stores, which RBC said could lift LFL sales by 1%-2% per year from the 2021 fianincial year, based on the precedent set by Dollar General in the US.

With the shares down 20% from their 12-month high at 16 times calendar 2019 earnings, the current valuation “looks compelling”, RBC felt.

Analysts at Peel Hunt upgraded convenience shop and newsagent operator McColl's to 'buy' on Friday as it highlighted some of the benefits of the group's move to trial Morrisons Daily fascias in ten of its stores.

Peel Hunt believe the move marks a "highly significant and highly positive development", noting that while the McColl’s fascia is popular and evolving, the switch to the Morrisons Daily fascia could "really help densities".

"This could just be the fillip McColl's shares need after a quarter or two in the doldrums: we are confident the trial will work and that the fascia will be rolled out to more stores," its analysts said.

Peel Hunt stated the rebrand might also gave McColl's a "real chance" to see its like-for-like revenues make progress again.

"For a highly operationally and financially geared business, that could be gold dust."

Although Peel Hunt noted results of the trials wouldn't be known for a while, the broker still felt the potential of the Morrisons Daily fascia could be significant and was capable of really moving the dial over the medium-term.

"This is a good opportunity to get behind the shares again, and one that we hadn’t seen emerging in the short term," concluded analysts Jonathan Pritchard and John Stevenson.

Analysts at Jefferies marked down their medium-term estimates for Centrica's earnings on the back of now lower projections for commodity prices and in anticipation of higher competitive pressures across the company's consumer and business units, leaving the dividend payout 'hanging by a thread'.

Nonetheless, while the energy supplier's credit metrics and dividend were seen as "borderline", new costs cuts and asset disposals meant a dividend cut was not "inevitable", Ahmed Farman, Charlote Chiew and Luca Cartechini wrote in a research report sent to clients.

The analysts also said they saw "limited progress" ahead at Centrica's growth divisions, Connected Home and DE&P.

As a result of all of the above, they cut their estimates for the company's EPS and earnings before interest and taxes for 2019-2021 by about 10%.

Balance sheet-wise, debt was not the problem, they said, forecasting that asset sales would push net debt down to the middle of management's range for £2.7-3.7bn.

But adjusted operating cash flow was seen at the low end of the firm's guidance for £2.1-2.3bn.

Combined, Centrica's retained cash flow to net debt was seen at 29% over 2019-2020, versus the 25% minimum required for a BBB+ rating on its long-term debt.

"With this, our view remains unchanged that Centrica's dividend is hanging by a thread, but new costs and disposals mean that the balance sheet pressure is not acute enough to make a dividend cut inevitable, in our view. However, we also think that a re-affirmation of the 12p dividend, without further balance sheet and growth measures, is unlikely to get much credit from the market."

Farman and his colleagues cut their SOTP-based target price for Centrica's shares by 12% to 110p, but reaffirmed their 'hold' recommendation on the stock.