Broker tips: Asos, Mothercare, Royal Mail

22nd May 2014 14:00

Despite the slowdown seen in Asos´s sales during the second quarter analysts at Goldman Sachs decided to upgrade the shares to 'buy'. Now the broker calculates that the digital fashion retailer´s three-year forward compound annual growth rate of sales will be at 31%, instead of 38%.That means that Goldman´s earnings per share estimates up until 2016 have been reduced by 18% on average, resulting in a large drop in its 24-month price target on the stock. The latter is now estimated at 6,250p versus 7,300p beforehand. That target implies a price-to-earnings ratio of 66 and an enterprise value/earnings before interest taxes and depreciation (EV/EBITDAR) multiple of 47 on the basis of their estimates for fiscal year 2015. However, Goldman continues to believe that the retailer is "well-positioned" to take advantage of the current shift in global apparel towards on-line. Under the assumption that 20% of sales migrate to the digital space then that market may be worth €425bn by 2030.Hence, they continue to forecast medium-term growth of between 30% and 40%. Even so, the firm is in an investment phase. As a result sales growth may moderate relative to their previous expectations, the broker admitted. Oriel Securities has reiterated its 'reduce' advice on Mothercare, saying the baby product retailer's core UK business may take time to return to profit due to price competition.Mothercare on Thursday reported another fall in annual UK sales, but said they were dropping more slowly than the year before.Oriel, which has a 175p target price on Mothercare, said its pre-tax profits were above its forecasts, but operating losses were "a touch worse" than it expected.The broker said the addition of a further £10m to the group's banking facilities was welcome, but it suspected Mothercare was "closer to its banking covenants than it might like". It added that pressure on prices in Mothercare's home and travel division remained and internet competition was likely to push them down further."Overall much remains to be done here and there is little sign of a medium term solution to the pricing pressure Mothercare faces," Oriel said."We remain cautious about the time-frame in which the UK business can hope to return to profitability and reiterate our 'reduce' recommendation."After Royal Mail posted solid numbers but warned on future competitive pressures, Panmure Gordon was one of several brokers to reiterate a 'hold' recommendation on the shares. Analyst Gert Zonneveld said the results were good, with profits in line with forecasts and net debt down significantly to £555m.However, he noted: "The company is facing a number of headwinds. The competitive market on the parcels side is more intense and the company is taking steps to remain leader in this growing market. "On the letters front, direct delivery is the main concern." RMG estimated that, without regulatory action, new rival TNT Post UK's publicly stated plans on direct delivery could result in a reduction of RMG's revenues "by over £200m" in 2017/18."Nevertheless," wrote the analyst, "the key value drivers of single digit revenue growth, margin expansion and underlying free cash flow growth remain the objectives for 2014/15."And despite this concern, he added that the group was confident enough to pursue a progressive dividend yield."Longer term prospects remain attractive, as we expect an element of regulatory intervention to protect RMG's need to achieve a commercial return on its activities. Dividends are likely to rise, partly reflecting a likely rise in the payout ratio. "Short term competition concerns, however, are likely to be a drag on the share price in the near term." AB