Broker tips: Staffline, Worldpay, Travis Perkins

Immediately after the UK’s vote to leave the European Union on 24 June, Berenberg had downgraded the Staffline to ‘hold’ as it felt “uncertainty about the UK economic and political outlook would generate headwinds for both the recruitment division and the PeoplePlus division”.

“Now that the dust has started to settle, the political outlook appears somewhat clearer and Staffline has reported a solid set of first half 2016 numbers, we feel that 'hold' rating was too downbeat,” said Berenberg.

Staffline, which specialises in logistics, e-retail, manufacturing, driving, food processing and white collar recruitment, last month reported a 39.5% jump in first half revenue to £414.7m, driven by its Staffing business. Underlying profits before tax soared 50.5% to £15.2m and the interim dividend was raised 40% to 10.5p.

“Given the clear long-term track record of the firm, the focus on temporary recruitment in less cyclical areas of the economy and good progress made in reducing leverage at the business, we upgrade the stock back to Buy with a price target of 1,250p,” Berenberg said.

The broker said while it continues to believe uncertainty has increased following Brexit and ahead of the Welfare to Work review, the shares remain 40% below peak despite no change in consensus earnings forecasts.

“We feel this potentially underestimates the scale of the business that management is trying to build.”

Berenberg added: “The high level of uncertainty surrounding the business outlook and hiring was one of the principal reasons behind our early July downgrade. However, Staffline has confirmed it has traded well since Brexit and that its focus on blue-collar temporary workers in less cyclical industries should provide resilience versus recruitment peers.”

Worldpay shares dropped on Thursday as Jefferies lowered its rating on the stock to ‘hold’ from ‘buy’ and cut its target price to 325p from 340p.

Jefferies said while the payment processing company’s first half results on Tuesday were “strong”, growth looks set to decelerate in the second half.

Worldpay reported a 6% rise in first half pre-tax profits to £168.6m on the back of a 10% increase in revenue to £2.1bn.

The group maintained its full-year guidance and said it was “well positioned to deliver a good performance” in the second half.

“While the UK’s vote to leave the EU has resulted in increased uncertainty, we do not expect it to have a material effect on Worldpay’s trading performance,” chief executive Phil Jansen said.

Looking ahead, Jefferies believes there will also be tough strategic decisions to be made, particularly in the US.

Worlday’s market share is less than 10% in the US. The company tried to sell is US business before its IPO last year but failed to do so.

“Management is now planning to invest in eCommerce solutions for its domestic US SME base, which is even more competitive than the UK, the latter having proved tricky for online penetration,” said Jefferies.

“Our view remains that the SME offline base in the US should be divested.”

Global e-commerce renewals will also hold back divisional growth in the second half, Jefferies warned.

The division posted a 25% increase net revenue, boosted by transaction volume growth.

“But, management stresses that these growth rates should not be extrapolated forward due to: (i) retention in first half 2016 of volume that was delayed in migrating off the WPG platform to lower-cost local acquirers; and, (ii) contract renewals in Global eCom, two global technology companies in particular, which are at lower transaction rates going forward,” Jefferies said.

While the company expects no further benefits in 2016 of interchange rates, Jefferies believes the guidance does not tally with the timing of fee changes.

The group’s guidance implies the rate changes were fully implemented months in advance of the EU legislation coming into force.

“Rate changes were phased in by Visa and MasterCard, but Visa's credit card interchange rate changes did not happen until 9 December 2015.

“Worldpay should, therefore, see an incremental benefit on its bundled contracts, which are about half of UK net revenue, while c.1/3 of UK transaction value is from credit card transactions. Management has been surprisingly unwilling to provide further disclosure on this point.”

Barclays downgraded Travis Perkins to ‘underweight’ from ‘equalweight’ and slashed the price target to 1,400p from 1,950p saying the UK’s vote to leave the European Union will have a large impact on the business than the market expects, which will hit the valuation.

“The combination of earnings risk, likely valuation downside and the potential for a lengthy period of uncertainty in the UK leads us to downgrade to an ‘underweight’ rating.”

The bank said it now assumes a slowdown in the UK leads to around 1% like-for-like sales growth in the second half of this year, down from around 3% in in the first half and flat LFLs in 2017, with around 3% EBITA growth in 2016 and a 5% drop in 2017.

“This is considerably lighter than the 30% decline in EBITA seen from 2007-09 but nonetheless puts us 5% below Reuters consensus for 2017 and 7% below for 2018 (adjusted for only those who have updated numbers post the EU referendum result).

“If we take Travis’s average historical 12x price-to-earnings multiple we estimate the market is pricing in LFL growth of around 3% for 2017.”

Still, Barclays insisted that it likes the company’s medium-term strategy and said the ‘underweight’ rating was not a result of it doubting strategy.

“We are of the view Travis Perkins’ five-year plan is likely to deliver market share gains without compromising returns.”