Broker tips: Pearson, Mothercare, Carillion

The bank said its investment case on Pearson was predicated on three main ideas.

It argued that cyclical headwinds, especially in US Higher Education, would abate from 2015 onwards and reckoned the transformation of the group towards digital and emerging markets would further help accelerate top line growth while operating efficiency gains would drive margin expansion.

“We were wrong,” said Exane.

“We concede that it will take the group much longer to see the benefits of the hoped-for cyclical and structural turnaround. We also believe that capital allocation issues are likely to further put pressure on the shares in the near term. We do not see significant upside in the share in the short term.”

Berenberg initiated coverage of Mothercare at ‘hold’ with a 250p price target.

“While we feel that Mothercare does have some potential to improve, we think the risk/reward ratio at current levels is not compelling.”

Berenberg noted that given the severe weakness in like-for-like growth and the contraction in gross margins in recent years, management is focused on rebuilding the business, aiming for more exclusivity, less discounting and greater customer engagement within stores.

The bank said it has pencilled in an average of 1.5% LFL growth for the next four years and gross margins moving up by around 75 basis points a year.

However, it said delivery here comes with a high level of risk, adding that a 1% change in LFL affects revenue by around £4m but, given the lossmaking nature of the UK business, affects EPS by around 20%.

Carillion got a boost on Friday after JPMorgan Cazenove upgraded its stance on the construction and support services company to ‘overweight’ from ‘neutral’ as it took a look at UK contractors.

JPM said the UK non-residential construction market is in recovery mode with meaningful opportunities in both the building and infrastructure markets.

The bank said it sees the greatest potential at Interserve, Carillion and Kier Group.

“UK construction and UK services markets represent around 50%-70% of each company’s revenue with the outlook for these markets solid, thus providing a strong base for growth across our forecast period.”