Broker tips: Intermediate Capital, UK Mail, Morrisons

21st May 2014 14:06

Profits, but at what cost? That's the question posed by analysts James Hamilton and David McCann at Numis to investors in shares of Intermediate Capital Group.The provider of mezzanine capital on Wednesday revealed a 25% decline in its loan book and a 13% fall in the profitability of its asset management arm. More significantly, the broker highlighted how the business, despite having leveraged exposure to assets that typically yield between 10-15%, only generates returns to shareholders of 9%. Due to the above the broker cut its forecasts for earnings per share (EPS) for this year and next to 36.2p (from 41.8p) and 38.9 (from 44.1p), respectively. Hence also the reduction to the company's price target, which was taken down markedly, to 363p from 475p, yielding a valuation of 0.9 times book value. So yes, the company has much to gain from an economic recovery in Europe, and has seen impairments decline from very elevated levels. Even so, they are expected to stay at double their December 2007 level."Having taken very substantial provisions through the crisis as collateral values and business earnings increase we expect Intermediate to benefit from potentially significant write-backs. Investors should not pay a premium for recovering a small amount of money they lost through the credit crisis," the broker concluded.The recommendation on the stock was kept at 'reduce'. Investec has raised its forecasts on UK Mail after the expanding parcel carrier said higher package and mail revenues helped it to lift annual profits and dividends.The broker increased its pre-tax profit prediction for 2014/15 by 3% to £24m and its earnings per share forecast to 34.6p from 33.5p.It also confirmed its 'buy' advice with a cashflow-based target price of 700p.Investec said: "UK Mail continues to innovate and recent improvements in its IT infrastructure put the group as one of the 'best in class', we believe."The significant capacity expansion should facilitate the next leg of growth."Deutsche Bank has advised investors to sell shares in Morrisons, saying a rise in the British supermarket group's shares was unwarranted and a 275p takeover bid was unlikely.Deutsche said it was downgrading the stock to a 'sell' with a price target of 190p, down from 200p.Morrisons' share price has rallied 10% in the last fortnight, outperforming rivals Tesco and Sainsbury's, Deutsche noted.But the broker said there had been no news to support the rise and the underlying value of the stock also failed to back this up.It highlighted sales falls in the last three months, which came before the supermarket launched a new price-cutting drive at the start of May.The broker said: "Typically, it takes at least six months before the impact of price initiatives are reflected in volumes and in the meantime, price cuts should negatively impact value growth."As such, we expect no improvement in Morrisons' sales trend in the coming months."Deutsche also pointed to speculation on financial website thisismoney.co.uk on May 15th about a potential takeover bid at 275p per share, which it said would be likely to depend on two "unlikely" scenarios including a sale of a material chunk of Morrisons' property assets or a material rise in profits. AB