Broker tips: Morrisons, Ted Baker, Provident Financial
Analysts at Bernstein upgraded their view on Morrisons on Thursday, touting its best-in-class long-term total shareholders' return and arguing that it made for a "great" income stock despite being unloved by the so-called 'sell-side'.
Although the grocer's free cash flow yield was set for a 'step-down' in growth from the 9% pace observed over the past four years to something closer to between 8% and 9%, it had grown profits and sales for two years in a row and "none of that is running out of steam", they said.
It also sported the lowest gearing in the sector.
Adjusting for leases its net debt was at just twice operating eanrings and if you credited the £600m pension asset then its net debt was zero.
Hence the analysts' projection for the firm to ramp up its pay-out ratio from 83% last year to 100% over the next few years.
On Bernstein's estimates, Morrisons was set to see its dividend yield rise to 6.3% next year, followed by growth of 7.0%, 7.4% and 9.0% in successive years.
Fashion retailer Ted Baker was under the cosh on Thursday as Jefferies cut its stance on the stock to ‘hold’ from ‘buy’ and dropped the price target to 2,700p from 3,000p.
The bank said Ted’s strategy to moderate growth in a tough environment is the right thing to do to protect the long-term strength of the brand. However, with top line growth pared back and Jefferies' three-year profit before tax growth expectations reduced from 16% to 13%, it cut the target price and downgraded.
"The brand's unique quirkiness, quality offering at affordable prices and meaningful international growth prospects remain attractive features of the group. However, given the near-term unseasonal weather in the US/Europe and management's cautious guidance, we believe the historical sales momentum underpinning the equity story will prove more elusive in the near term."
As Jefferies downgraded, RBC Capital Markets reiterated its 'outperform' rating on the stock, saying the equity story remains one of "measured international expansion, stable/slightly improving margins and e-commerce led growth".
Provident Financial is planning a £330m rights issue after reaching a resolution with the Financial Conduct Authority over its ROP product but Berenberg has downgraded its rating to 'sell' from 'hold' as it sees various risks hanging over profits
The German bank sees the risks emanating from the regulatory environment, margin pressure from the core Vanquis banking arm and execution risk from the recovery plan for the home credit business.
Several major pieces of thematic work by the City watchdog are due to be updated in coming months, which Berenberg says are "potentially detrimental to the consumer credit lenders". These include the FCA's expected reports on persistent debt in the credit card market, affordability assessments in consumer credit, high cost credit including home credit, and remuneration and incentives for staff.
This is not to mention the regulator has already said that the initial review of the vehicle finance market has uncovered potential issues about affordability for borrowers with lower credit scores.