Broker snap: Axe taken to Home Retail estimates

11th Mar 2011 10:40

With the performance at Argos weaker than expected, UBS stays cautious on the chain's owner, Home Retail Group (HRG), and downgrades estimates on the back of rising costs and weaker sales.Group pre-tax profit was around £10m below previous guidance for the year ended 26 February, primarily as a result of weaker Argos sales, while trading at Homebase - HRG's other chain - was better than expected, according to the broker.UBS reduces like for like (LfL) sales growth estimates at Argos to -4%, from -3%, but raises Homebase LfL forecasts to flat, from -2%.However, while the broker anticipated a 2% decline in wages, petrol, utilities and rates in 2012, HRG's guidance of a "modest increase" disappointed. When adjusting for 1% higher costs, the broker downgrades 2012 pre-tax profit by £50m, and earnings per share to 16.8p, from 21.1p.A 'neutral' stance is kept, while the target price is lowered to 190p, from 210p.Singer Capital Markets takes a more bearish stance. Its target price is cut to 159p from 180p and the "sell" recommendation is reiterated, as things are clearly very tough on the high street.The broker has downgraded its current year earnings estimates by 3.8% while for fiscal 2012 the profit before tax forecast is cut by 20% to £200m on the back of management's initial planning assumptions. "One hopes this marks the end of the downgrades but it is not guaranteed," the broker glumly acknowledges."Bulls of the stock are likely to start talking about the group as a potential bid target again, but we remain sceptical in the short term. The obvious candidate would be ASDA given its stated non-food ambitions but we suspect that all the grocers are likely to push hard to take share from Home Retail over the coming 12 months on an organic basis," Singer said.On the face of it the dividend yield of 7.4% looks very juicy but Singer thinks a dividend cut could be on the way next year, as, based on the broker's earnings estimates, the dividend cover drops to a threadbare 1.18.