Broker tips: BT, Thomas Cook, TUI, Burberry
BT Group got a lift on Wednesday as Morgan Stanley upgraded its stance on the stock to ‘overweight’ from ‘equalweight’ and bumped up the price target to 490p from 450p.
It noted the shares have underperformed the FTSE 100 by a disappointing 41 percentage points in the last 12 months, providing a good entry opportunity.
The bank pointed to three reasons why it expects a better share price performance this year: better operational news flow ahead, gilt yields coming off their lows - which is good for pensions - and a compelling valuation.
MS said its AlphaWise survey indicates further strong quarters ahead for BT with market share wins in broadband and TV and rising average revenue per user. In addition, it sees further success in BT Mobile, driven by the recent push into family SIMs and the Enterprise market.
It also said that full legal separation of Openreach is unlikely to play out given the higher pension costs it could trigger.
As far as yields are concerned, it noted AA UK corporate bond yields have bounced from a low of less than 2% in early September to 2.7% currently, which is positive for BT’s pension due to a lower present value of liabilities.
On valuation, it highlighted the fact that BT is trading at a 16% discount to the median UK stock from almost parity in late 2015/early 2016.
Thomas Cook and TUI slumped on Wednesday after Credit Suisse downgraded its rating on the travel stocks.
Credit Suisse cut its rating on Thomas Cook to ‘neutral’ from ‘outperform’ and lowered the target price to 87p from 88p, citing worries for the company’s outlook in 2017 and 2018.
The first concern includes the prospect of falling real wages and the highest level of fuel and foreign exchange inflation since 2009 in the UK, which represents 46% of 2017 group earnings before interest and tax (EBIT).
“This is a concern as holiday volumes are 74% negatively correlated with such inflation.”
Credit Suisse lowered its 2018 UK margins for the company by 50 basis points to 6.3% and as a result, it expects earnings per share will decline 8%.
The second concern is Germany, which accounts for 22% of 2017 EBIT, where airline capacity growth has accelerated to 6% and low cost carriers are present on just 20% of key sunny and beach routes, compared to 80% in the UK.
“In contrast to TUI we don’t have the same concerns on cash flow generation (FCF yield 9.6% 2017-20E vs 4.4% at TUI) plus highlight Thomas Cook's superior margins and returns,” Credit Suisse said.
The financial services group downgraded TUI to ‘underperform’ from ‘neutral’, saying it also sees exposure to a tough outlook in the UK and Germany, the company’s two largest markets.
“This coupled with a lack of cashflow (average 2017-20E free cash flow yield 4.4%) and 50% premium to Thomas Cook (now rated neutral) leads us to downgrade to underperform,” Credit Suisse said.
Despite €0.8bn of disposal proceeds consensus forecasts for 2017 net debt have risen €1.2bn over two years, it said.
Credit Suisse also believes reported hotel and cruise performance is “flattered”. Since 2014 more than half the growth in hotel EBIT has accrued to minorities. Cruise return on invested capital (ROIC) was stated as 21% in 2016, but Credit Suisse said it doesn’t view this as a true measure of returns due to joint venture accounting and noted that TUI Cruises all-in ROIC was only 9%.
Barclays upgraded luxury retailer Burberry to ‘overweight’ from ‘equalweight’ and upped the price target to 1,760p from 1,450p on strategy and valuation.
The bank said Burberry offers good value at 15% discount to the luxury sector, which it reckons is unjustified given the company’s well laid out strategy to drive store density in the medium term.
In the shorter term, Burberry should benefit from its cost-reduction programme, which it expects to save at least £100m.
“With the new CFO/COO arriving in January and new CEO by the summer, we believe the company will generate positive momentum in 2017. The group reports Q3 retail sales on 18 January – although we do not believe this is a catalyst given the medium to long-term benefits of the strategy.”
Barclays said that given the period of transition, the results will be less relevant than normal and the focus will be mostly on the group’s strategy. It expects an update on the cost initiatives where the company targets at least £100m of savings, and more importantly for the strategy, the success of the recent bag launches – bridle, patchwork and buckle bags – in line with Burberry’s strategy of growing accessories.
In addition, the bank said the share price now seems underpinned following various press reports suggesting US-based Coach was interested in buying the company at a 30% premium.