Broker tips: Dunelm, Hargreaves Lansdown, CCH

The broker said there are short-term costs for Dunelm ahead of delivering its long-term objectives for doubling market share. Its long-term goal will require “substantial development of many aspects of the business, including range development, store format and operations, channel penetration, and IT & logistics infrastructure”, Canaccord said.

“Capital expenditure and depreciation have been and remain on a rising trend, and in line with recent years, operating cost growth looks set to exceed top line sales growth for at least another two years.

“Unlike past years, the potential for mitigation from gross margin expansion looks more muted, and with Q1 trading under pressure from hot weather depressing footfall, to cite CEO John Browett's words, Dunelm is facing ‘another tough year’.”

Dunelm reported in the 52 weeks to 2 July pre-tax profit rose to £128.9m from £121.4m in the 52 weeks to 27 June 2015, on revenue of £880.9m, up 7.1% from the year before.

The company recommended a final dividend of 19.1p per share compared to 16p in 2015 and giving a full-year dividend of 25.1p per share, up 16.7% from the prior year. In addition, the company paid a special dividend of 31.5p per share during the year.

Canaccord cut its estimates for 2017 pre-tax profit by 5% and its forecast for 2019 by 9%, reflecting more modest like-for-like gross margin assumptions, the expectations of operating cost growth and the uncertainty surrounding Brexit.

However, the broker said underlying cash generation remains strong and it continues to forecast an annual return of capital to shareholders at £65m per year or 32p per share, which more than doubles the ordinary dividend yield.

“Dunelm remains a quality company with very strong cash generation. Our forecasts still deliver earnings growth against a more uncertain consumer backdrop, albeit at a reduced rate, while its targeted investment programme acts as a drag on operating margin over our forecast horizon.”

Liberum downgraded Hargreaves Lansdown to ‘sell’ from ‘buy’ pointing to further downside risks.

The brokerage said that while there is no doubting the company’s “formidable” track record and the strength of the business model, trading on a price-to-earnings of 36x with the prospect of consensus downgrades and significant industry headwinds, the risk/reward is unfavourable.

It pointed out that full-year 2016 results were 4-5% ahead of expectations, helped by a more positive market movement than originally expected, with group net income margin slightly ahead of Liberum’s forecasts at 0.56%.

However, the cut to base rates means Hargreaves will now earn significantly less income from clients’ cash balances.

Liberum noted guidance for FY17 was to expect a margin of 0.35%-0.45% and said it now assumes 0.40%, down from 0.53%.

“Guidance was not forth

Analysts at Credit Suisse upgraded their recommendation beverage bottler Coca-Cola HBC (CCH) and lifted their target price on the shares given its attractive top-line growth and EBIT potential.

Faster growth in asset turns should also drive stronger returns on invested capital, analysts Sanjeet Aujla, Laurent Grandent, Pavan Daswani and Clay Crumblis said in a research note sent to clients.

CCH also offered better visibility on margins via cost synergies and was expected to deliver higher organic growth than peers such as CCEP, because of its more attractive footprint in geographies with greater consumption on a per capita basis.

The bottler's low level of gearing - with net debt to EBITDA standing at just 1.3 - also meant it was better positioned to "redeploy" its balance sheet through cash returns and mergers and acquisitions.

"We believe CCH and CCEP could both participate in further consolidation of the Coca-Cola bottling network, and in particular both could exploit opportunities in Africa," the analysts said.

The broker also said it preferred shares in CCH over those of CCEP on account of its organic growth profile and near-term balance sheet optionality.

Credit Suisse upped its recommendation on CCH from 'neutral' to 'outperform' and hiked its target price from 1600p to 1950p.

coming for FY18, however, our forecast assumes 0.25%. If the Bank of England reduces further, possibly to 0.10%, that would result in a further loss of £11-13m per annum in FY18 & FY19, an additional 4-5% downgrade to earnings,” it said.

“All things being equal, we would need to see the shares at about 1100p before we became buyers,” it said.