Broker snap: Buy Halfords despite downgrades, says finnCap

19th Nov 2010 11:07

Despite Halfords suffering a series of setbacks in recent months, finnCap remains a 'buyer' of the car and bike parts retailer for its above average yield.The company's interim results were generally in line with expectations, with pre-tax profit coming in only £0.7m higher at £86.7m.Retail gross margins were 5 basis points better than finnCap expected, but this was partly offset by gross margins at its car service Autocentre being around 1 percentage point lower than estimates.Analyst David Stoddart notes that the adjusted diluted earnings per share increased 15% to 23.8p and the interim dividend grew by a third, "partly to re-balance the annual payout towards the interim but partly to reflect strong cash flow".Net debt at the end of £110m at the end of the first half was over £30m better than expected. "A stronger than expected working capital inflow and a lower than expected tax outflow appear to explain most of the difference," says Stoddart.However, like-for-like sales during the first six weeks of the second half were 5% lower than finnCap was modelling. Therefore, the broker's forecasted pre-tax profit for the financial year has declined to £129.1m from £133m and its target price, based on a PE ratio of 12, has been cut from 545p to 525p.Despite the downgrades, finnCap says 'buy'.