Broker tips: Card Factory, Direct Line, Serco

11th Aug 2015 14:03

(ShareCast News) - Broker Peel Hunt reiterated its 'buy' recommendation for Card Factory, saying the retailer was one of its top picks for the sector, especially as it was "all systems go" for the upcoming special dividend.First-half results from the FTSE 250 group indicated a 1% acceleration in the second-quarter pace of growth to 8% like-for-like sales.There were a few more store closures in Q2 "but the fact is that underlying LFL has picked up here", Peel Hunt said, which implied further market share gain."The impact of WH Smith's Card Market has clearly been negligible and has not destabilised the overall market, and it is surely time for a strategic change of direction - and probably store closures - at Clintons."The broker also expects that, net, there will be less competition this time next year than there are now, indicating that the barriers to entry from the vertical integration are working.But the main focus was the cash return that management has pledged, with news expected of a "material cash distribution " with the interim results on 22 September.'Cash Factory', as the broker calls the company, is extremely cash generative, with new stores paying back in less than a year and the business model requiring limited underlying capex and working capital investments."Management has been very clear that it will return any excess cash to shareholders and we think that this means a return of between £220m and £335m over the next three years." Analysts at Charles Stanley downgraded insurer Direct Line Group to 'reduce' from 'hold', and advised investors to take profits.The brokerage moved its price target up to 387.8p from 350p. Shares in Direct Line were trading at 383.7p at 0951 BST, having lost 1.06% since the market opened.Charles Stanley analyst Minal Shah said in a note it would be prudent to take profits, despite ongoing bid speculation buoying the insurance sector.Shah said Direct Line had delivered a strong first half performance, aided by benign weather which may not continue.The analyst said shares in the company had already delivered about 41% total return since mid-December 2014 and had outperformed the FTSE 100 by about 32%."We struggle to see the stock delivering the same level of outperformance in the near term (absent a takeover approach), with potential c.15% downside to what we would consider to be fair valuation as a standalone going concern." Bank of America Merrill Lynch has maintained its 'neutral' rating on troubled outsourcing group Serco after the group posted a first-half pre-tax loss of £76.2m.The broker warned that although the group's Compass asylum detention centre operation benefited from lower UK asylum numbers, the ongoing migrant crisis in Calais, where immigrants are trying to enter the UK, "warrant caution" for the second half.Merrill also noted Serco's "slightly fuzzy caveat" that risks associated with full-year guidance are now weighted to the upside."Revenues and profits will continue to be under pressure in 2016 as previously indicated, and the company has now given some more guidance on this," the broker said in a note."We leave our trading profit forecasts broadly unchanged for 2015 (£92.5m), although we trim our revenue forecasts for 2016 earnings by (around) 4% to reflect the increased disclosure on the revenues up for rebid and timing of new contract opportunities. We also take our 2016 trading profit down by (around) 2%."RBC Capital Markets, meanwhile, said 2016 would be the key year for the group."There is slightly more detail on 2016 revenues, where known attrition will reduce revenues by £350m and there are another 60 contracts to be rebid between now and 2017, with aggregate annualised revs of £140m for the remainder of 2014, £340m in 2016, and £360m in 2017," the broker said."Hence there is a significant risk that revenues could be well below consensus of £3,325m for 2016 and 2017. Management will update on 2016 guidance at the full year.""Elsewhere, management is doing the right things with regard to costs (£200m op cost reduction) and implementing the strategy, but there remain lots of moving parts and clearly the recovery is going to take a long time, which we think is largely factored into valuations already."