Broker tips: Kier, BT, Rightmove
FTSE 250 construction group Kier was under the cosh again on Tuesday as Canaccord Genuity cut its stance on the stock to 'hold' from 'buy' and slashed the price target to 525p from 1,200p to take into account the heavily-discounted rights issue announced last week and macro risks.
Kier said last Friday that it was raising around £250m net of expenses through a 33 for 50 rights issue at a price of 409p per share. The issue price represented a discount of around 34% to the theoretical ex-rights price using the closing price as at 29 November.
In addition, Kier confirmed that current trading and the outlook for FY19 remain in line with the board's expectations but also said that credit markets were difficult.
Canaccord highlighted lower leverage but ongoing risks.
"Clearly the balance sheet improves with a commensurate reduction in financial risk. However, after fees, a worse than previously assumed working capital outflow and confirmation of the average debt level using daily averages, the annualised benefit from the rights issue is arguably only around £90m," the brokerage said,.
Canaccord said that while the cash outflow related to FY2019 dividends reduces significantly to around £25m, the cash outflow related to dividends bounces back to around £60m from FY2020.
"We expect leverage to be below 1 times in FY2020 using average debt, but clearly there remain macro and political risks related to Brexit and working capital outflows potentially being worse than we currently expect cannot be ruled out given the industry and macro backdrop."
BT's discount to peers is "increasingly unwarranted", Goldman Sachs said on Tuesday as it lifted the stock to 'buy' from 'neutral' and upped the price target to 320p from 240p, noting implied upside of 24.7%.
GS argued that BT's 10% discount to sector peers is unjustified as the group starts to deliver earnings momentum with improving regulatory clarity.
The bank said its price target hike reflects growing confidence in BT's long-term growth outlook and its higher margin estimates.
"BT's cost transformation (FY19-21E) is already paying dividends, and the bottom-up nature of the plan should minimise future execution risk ahead of a new CEO in 2019, alongside the longer-term opportunity for digital cost-cutting," said Goldman.
"We believe this will drive a stabilisation in return on invested capital despite regulatory headwinds, with returns looking relatively attractive versus sector peers."
Goldman added that its forecasts are now ahead of consensus for the first time in two years.
Rightmove was the standout gainer on the FTSE 100 on Tuesday as Deutsche Bank upped the stock to 'buy' from 'hold' and lifted the target price to 530p from 440p, highlighting its attractive valuation.
It noted that since their peak in June 2018, Rightmove shares are down almost 20%.
"This is an unusual scale drop for a steady market leading online classified business, which consistently delivers 76% operating profit margin and returns circa 4% per annum of market cap to shareholders via dividends and buyback."
DB said the stock came under pressure on competition news flow and a UK and tech sector sell-off. However, it argued that concerns are overdone and there is potential for a re-rating.
"The stock is trading towards its five-year low on one year forward EV/EBITDA multiple and just at 2.5x premium to AutoTrader (Hold; 437.3p) on one year forward price-to-earnings, versus historical high of 10x."
The bank said it has upgraded its estimates and is now 4-8% ahead of consensus earnings per share in 2018-2020 as it is more optimistic on the sustainability of margins. DB said its new target price offers 20% potential upside.