Broker tips: Card Factory, Synthomer, Rolls Royce

The brokerage said it was bumping up its rating on Card Factory following share price weakness after the stock dropped more than 30% since the company's last update in January.

"Whilst it was disappointing to downgrade numbers in January, this needs to be set in the context of cost headwinds (FX, wages) and ongoing investment into the group's systems and infrastructure.

"Card Factory’s deep vertical integration, established over many years, has created sustainable, long-term competitive advantages. It supports a disruptive value proposition, best-in-class margins, high returns on investment and prolific cash generation, which allows for both disciplined reinvestment and a sector leading sustainable dividend yield."

The brokerage has a 240p target on Card Factory and noted that opportunities still existed in a tough market.

"Sector news flow, data points, and recent inclement weather suggest Q1 is proving tough. This is not overly surprising and while being consistent with the cautious outlook statements from Christmas reporting, the divergence between ‘old and new’ retail is widening.

"It is not all doom and gloom, however, and there are resilient performances from some high-quality companies. Recent share price moves also present opportunities."

Credit Suisse upgraded its view of Synthomer and increased the speciality chemical company's target price as it sees negative risks surrounding oversupply and raw material pricing have started to abate.

The Swiss bank upped Synthomer's target price to 460p from 390p as it upgraded the maker of nitrile rubber for surgical gloves to 'neutral' from 'underperform'.

"We credit management for successfully limiting the negative profitability impact of nitrile oversupply and significant raw material price inflation in 2017 – we believe the business is now well positioned for further cost saves in 2018, organic growth in 2019 and potential large-scale M&A," analyst Matthew Hampshire-Waugh said in a research note on Wednesday.

He pointed to Synthomer's more resilient cost base, growth pipeline and integration of bolt-on acquisitions, which increased confidence that the company was "much better positioned to secure and execute on a large deal in the near term".

The FTSE 250 group excess of £200m on the balance sheet may lead it to search for "transformational M&A in adjacent chemistries/specialty chemicals", the analyst predicted, though further M&A was seen as both the biggest positive and negative risk.

"We believe Synthomer is fairly valued at ~10x EBITDA given the more limited downside risks on earning."

Credit Suisse also had some positive things to say about Rolls Royce after the British jet turbine manufacturer showed strong underlying cash generation at its earnings presentation.

After Rolls-Royce delivered a better than expected free cash-flow in 2017, despite absorbing £170m of outflow related to in-service issues with the Trent 1000/Trent 900 engines, analysts at Credit Suisse said the firm was continuing to "improve the transparency about its earnings and cash", with the group not expecting any further issues with the Trent XWB, with good in-service performance and a stronger design process.

However, given the scale of the XWB programme, any material issue would likely have "an oversized impact".

On the downside, Credit Suisse did find Rolls' dividend of 11.7p for 2017 "slightly disappointing", noting that as the group was making a "big strategic push" in electrification and digitalisation, it could lead to some of the cash generated being allocated to mergers and acquisitions rather than shareholder return.

Credit Suisse stood behind its earlier target price of 720p and 'underperform' rating on Rolls Royce.

"The jump in the stock price appears logical if one assumes that the underlying cash generation is £100-150m better than expected structurally (i.e. excluding the “exceptional” in-service issues) and that the market is willing to pay a 6.5% FCF yield for the stock on 2020E," the analysts concluded.