Broker snap: A dividend cut at Halfords not a worry, J.P. Morgan says

8th May 2013 12:12

Good management alongside a strong product offering makes for a potent mix. That, in essence, is the reason why analysts at J.P. Morgan have today revised their target price for Halfords to 405p from 243p before. The broker expects the retailer and car maintenance group´s upcoming strategy update to be on driving the top-line through a 'halo effect' of better service, wider product range and a stronger multi-channel offering. That, combined with their expectation for high quality management should drive increasing investor enthusiasm in the firm´s 'equity story.'As a result of this they have decided to apply a 20% premium of to the sector´s long-run average price-to-earnings ratio (PER) of 12.5 times earnings, which yields said March 2014 target price of 405p. In turn the resulting valuation is backed up by the valuation of its discounted cash flows (a measure of the present value of the real funds which a company is expected to generate once they are adjusted for the risk - as measured by the volatility of its share price - inherent to its business, when compared to that of the wider market, and the passing of time). More specifically, and linked to all of the above, they view current fiscal year 2015 forecasts as conservative and see 10% upside to current consensus retail revenue estimates. Nevertheless, the company is likely to flag that incremental investment via operating expenditures would have a dampening effect on the profit uplift, they add.Worth pointing out, J.P.Morgan also believes that given the outfit´s light dividend cover of only 1.2 times, a dividend cut is possible. However, even under the scenario of a reduction of up to 30% Halfords would continue to be the highest yielding stock amongst its UK peers (free-cash-flow yield is amongst the highest in the sector at 9%).The new target price implies 10% potential upside and so they raise their recommendation to overweight, from underweight. Shares of Halford´s are now rising by 3.3% to the 381.10p mark. AB