Broker tips: Home Retail, Morrisons, F&C Asset Management

11th Mar 2011 12:50

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.Morrison's full year numbers came in slightly ahead of expectations, and Nomura remains encouraged by the grocery retailer's growth strategy and buyback.The group has committed to buying back £1bn of shares over a two-year time frame to be financed by a new facility initially and by a bond issue later this year. As a result, the Japanese broker expects around 10% of pro forma earnings per share accretion which should work through over the next two to three years.Additionally, after meeting its objective to lay 0.4 million square feet of selling space, Morrison "upped the ante" to target a quicker expansion over the next three years, representing space growth of 8% by 2013/14, "which should convert to an initial sales contribution of circa 5%, with more than 90% relating to food," says analyst Nick Coulter.The broker sticks with a 'buy' and target price of 280p.Matrix Group is also a buyer of the shares, with a higher target price than Nomura of 325p."We estimate that the buybacks will be earnings enhancing by 5.1% in 2011/12 and 8.8% in 2012/13," the broker said, adding the caveat that it is "impossible to forecast exactly when and at what price the shares will be bought back." Matrix's calculations assume an even spend on share buybacks throughout the two year period at an average of 300p a share this year and 330p a share next, but the later the buy-back programme kicks in, the lower the interest charge Morrison will have to swallow. "In typical Morrison fashion, the company expanded on its very steady move into ecommerce following the recent acquisition of kiddicare.com and the purchase ... of a 10% stake in FreshDirect, a profitable internet grocer operating in New York. (Shurely shome mishtake? Did they not spot the 'New' bit?)," the broker continued."The plan is to learn the ropes and launch morrisons.com over the next two years, offering non-food by 2012/13 and food by 2013/14. It remains to be seen whether Morrison can actually make a profit out of this. We do not believe that Tesco or Sainsbury do, certainly not if store costs were to be properly allocated to their online businesses. Morrison is giving itself every chance though, and the kiddicare business certainly seems to be scalable. It is unlikely that Morrison will overcommit capital without good visibility of profit," Matrix added."Further efficiency savings in the pipeline will allow Morrison to compete should competition hot up, while the new store opening programme is accelerating," the broker said, explaining its case for a "buy" recommendation. Until uncertainty around F&C Asset Management's business strategy is resolved, Credit Suisse expects the fund manager to underperform the sector."Management indicated that a strategic review will be conducted with the outcome expected in months rather than weeks. Whilst management's intention on increasing revenue margins and reducing costs is applauded we believe focus will be on execution and how the current strategy fits with the new board," says analyst Gurjit Kambo.The broker keeps hold of its earnings per share (EPS) estimates in 2011, but increases 2012 forecasts by 7% to reflect the inclusion of around two-thirds of the £12m identified cost savings coming through. The target price is raised from 65p to 80p."Despite the increase in target price, we see better fundamentals elsewhere in the sector and until we get better clarity on the strategy going forward we leave our relative rating unchanged at 'underperform'," says Kambo.