Broker tips: M&S, Kingfisher, ITE Group

4th Apr 2016 15:57

(ShareCast News) - Ahead of Marks & Spencer's results on Thursday, Berenberg reiterated its 'sell' recommendation and cut its earnings forecasts for the next three years due to the continuing decline in clothing sales.Thursday's fourth-quarter results for the three months to 31 March 2016, coming ahead of final results on 25 May, are expected to show general merchandise (GM) like-for-like (LFL) and total sales growth both decline 2.5%.In Food, Berenberg believes M&S's focus on innovation and convenience will drive continued outperformance with 0.4% LFL growth and 3.4% total growth in the quarter.With former clothing boss Steve Rowe taking over from Marc Bolland as chief executive at the weekend, analysts at the bank view said he had two options to counter the highly competitive sector backdrop that has resulted in roughly 23 quarters of GM LFL sales declines and circa 7% price deflation across the sector: invest in lowering prices or improving product quality.For the just-ended 2016 financial year, Berenberg forecasts a 250 basis-point GM gross margin improvement, in line with current guidance, but for the next two years has cut its expectations by more than half to 75bp and 50bp respectively."Given issues with brand perception and store locations, we are unconvinced such investments will derive the required increase in revenues," they wrote."Furthermore, we believe the shift of sales online adds incremental cost, but is simply cannibalising store-based revenues, putting pressure on margins."On the view that that the stores "are too big", which resulting broad-church approach weakens brand perception, analysts believe in order to protect margins M&S must significantly reduce its estate.However, with 60% of space freehold and only 28% of leases expiring within the next five years, they believe an extensive restructuring is highly unlikely.Berenberg, which has set a price target for the retailer of 380p, also cut full year earnings per share estimates by 2.9% for 2016, 4.0% for 2017 and 4.1% for 2018. Kingfisher has been given a 'reduce' rating by Numis after the company's recent full year results.Numis said it was yet to be convinced that the home improvement retailer's transformation plan will successfully address the group's low return on capital employed or develop new growth channels. The broker reiterated its target price of 325p, which compares to the share price of 378p at 1123 BST on Monday."Meanwhile, the liquidity profile is less compelling," said Numis analyst Matthew Taylor."We view the valuation as challenging on 16.6 times price-earnings ratio/ 4% free cash flow yield to full year 2016."The company, which owns B&Q and Screwfix, last month reported a 0.3% increase in adjusted pre-tax profit to £686m despite a 2.6% drop in adjusted sales to £10.3bn due to foreign exchange headwinds.Kingfisher said its five-year turnaround plan, announced in January, was on track but warned that profits would be hit in the first two years with a total expected cash cost of £800m. The company expects the plan to deliver a £500m sustainable annual profit uplift by end of year five."We remain sceptical that the strategy will eventually achieve £500m per annum of incremental profit and view the implementation costs, notably the £800m cash impairment, as significant," Taylor said.However, the analyst said the 2016 full year results slightly beat estimates and Numis has raised its 2017 forecast by 4% due to a more favourable currency backdrop.The underlying trading picture was said to be "solid enough", while the shares have benefited from the recent weakness in sterling with the 10% fall equivalent to a "circa 5%" upgrade. Canaccord Genuity has kept its 'hold' rating and target price of 145p unchanged for ITE Group after the exhibitions organiser reported its first half trading update.The company on Monday reported a 12% increase in first half revenue to £63m, lifted by strong performances from acquisitions including Breakbulk and Africa Oil Week.On a like-for-like basis, revenues fell 4% but represented a material improvement from the 13% decline in its first quarter.ITE said the results were in line with management expectations.The group warned that its like-for-like trading volumes for full year 2016 are around 9% less than this time last year, and like-for-like revenues are also 9% behind last year's comparative. Both are in line with expectations, ITE said.Canaccord said the full year declines implied a further deterioration into the third quarter at an estimated like-for-like decline of 15%, reflecting the impact of the weak macro-economic backdrop particularly in Russia, impacting key events such as Mosbuild.However, the broker said it should be offset a modest improvement in the rouble against the pound and the rising oil price."Overall, we see little reason to change our full year forecasts, with pre-tax profit (norm) of £37.0m and fully diluted earnings per share of 11.1p, both broadly in line with consensus," said Canaccord analyst Simon Davies.He added that given recent weak performance with shares down 8% in the year to date, Canaccord expected to see a modest short-term rally."ITE is trading on a calendarised 2016 price to earnings ratio of 12.9x and a 10.0x enterprise value / earnings before interest, tax, depreciation, and amortisation at our target price of 145p," Davies said."This represents a modest discount to its peer group, merited by its high exposure to Russia/Commonwealth of Independent States. And with £70m of net debt, we see limited scope for additional M&A to drive upgrades."However, he did note that the shares do offer an "attractive" 5.1% dividend yield.