Broker tips: Sports Direct, Royal Mail, Inmarsat

"We expect the combination of a demanding European apparel demand environment, gross margin pressure and elevated opex growth due to a one-off wage bill increase to stall Sport Direct’s EPS progress in FY16, FY17 and FY18, despite the European football event this summer."

Reflecting the current demanding market and "a slower second-half sales growth trend", Goldman has cut its forecast for earnings before interest, tax, depreciation and amortisation (EBITDA) for the full year by 4% to £375m and for next year by 8% to £365m.

On top of this lower EBITDA base, Goldman said its concerns about gross margins were that the company would find it difficult to pass onto customers the recent input cost inflation being driven by currency fluctuations.

Together, this has resulted in it cutting its full year pre-tax profit forecast to £282m and further to £264m for 2017, leading to earnings per share of 36.04p and 33.76p.

The target price for the shares was also slashed to 400p from 525p.

Royal Mail’s shares gained on Monday after RBC Capital Markets raised its rating on the stock to ‘sector perform’ from ‘underperform’ and lifted its target price to 525p from 445p.

The postal delivery service last week reported a 33% drop in full year pre-tax profits to £267m as UK revenue fell 1% to £7.6bn. Letter volumes dropped 3% while parcel deliveries rose 3%.

RBC said it sees “modest recovery in the parcel price/mix as the company becomes more volume selective”.

The broker said the summer/autumn season should see greater certainty emerge on the direction of future wage inflation, cash pension costs and more detail from Ofcom on its review of the regulation of the company.

RBC said with stability on these points, Royal Mail will be free to increase focus on efficiency efforts that might improve the logistics, sorting and delivery processes.

RBC lifted its earnings before interest and tax forecasts by 1% for fiscal years 2017 and 2018 – “based on a presumption of a competitive parcel market pricing closer to the five-year median price/mix seen at Austrian Post, DP DHL, CTT, Post NL and Swiss Post”.

Morgan Stanley downgraded Inmarsat to ‘equalweight’ from ‘overweight’ and slashed the price target to 800p from 1,350p as it cut its earnings forecasts for the stock.

The bank said that despite a 33% drop year-to-date, offsetting a 42% jump in 2015, revenue guidance is too ambitious and there is scope for earnings downgrades.

It pointed out that management has already cut 2016 revenue guidance by 4%, but kept 2018 targets, and MS expects these to be the next to fall away. It reduced its 2017-2018 earnings per share forecasts by 18-22%.

“Inmarsat targets revenue growth of 2% in 2016, but sees acceleration to 11-13% compound annual growth rate for 2017 and 2018. We think this looks too ambitious given pressure in the data business, with Eutelsat citing ‘slowing industry-wide growth’.”

It said the revenue boost for Inmarsat relies on Global Xpress, mostly in the maritime and government markets. However, Morgan Stanley sees two headwinds in maritime: a recession in the global maritime market resulting in vessels being laid up or scrapped, and increased competition in new growth markets, such as cruiseliners and oil & gas rigs.

While the bank acknowledges that Inmarsat is entering a growth phase where new satellites are coming into commercial service, it said that excluding the satellite launches, underlying revenue growth is broadly flat to low-single digit.