Broker tips: Sainsbury's, Thomas Cook, WANdisco

16th Mar 2016 15:53

(ShareCast News) - Nomura has cut its price target on Sainsbury's ahead of Friday's bid deadline for Argos owner Home Retail, after an uneventful trading update.With the grocer's shares having risen to 280p, Nomura calculated that around 50p of that was from the value-creating potential of the Argos deal, assuming the 175p acquisition price that the February cash-and-shares offer now represents.Although 175p made sense when Sainsbury was the only bidder, the gatecrashing of the bid by Steinhoff International means the FSTE 100 supermarket group must either give away some of that 50p by enhancing its offer, or walk away from the deal entirely and give away all of it. Ahead of the 18 March offer deadline, and after anNomura has adjusted its short-term model to take two scenarios into account.The new 250p target price assumes a 50% chance that Sainsbury's bid sweetens to 200p, including a £900m rights issue so it can match the Steinhoff's all-cash offer, knocking the shares back to 265p, and a 50% chance that Sainsbury is outbid by Steinhoff, sending them down to 230p."We do not claim that the rally in Sainsbury shares has been driven entirely by Argos; indeed, there is a chance the market reacts positively if Sainsbury withdraws from the race, at first."But we think we know that our fundamental valuation will end up below 280p in either scenario," analysts wrote.Sainsbury's fundamentals remain solid for Nomura, having been the most resilient of the Big four grocers through recent years but it sees limited scope for Sainsbury to relatively surprise on its margin growth in the medium-term.The fourth quarter trading update on Tuesday omitted any comment on full year margins, which analysts interpret as meaning "major surprises versus consensus should not be expected on 4 May". Tour operators Thomas Cook and TUI were under the cosh after Citigroup downgraded both to 'sell' from 'neutral', although the bank expects solid second-quarter statements from them.The bank cut its forecasts on Thomas Cook amid ongoing earnings risk given an expected significant European airline capacity increase which could put pressure on prices.It also pointed to a tightening supply/demand balance for hotels which could put pressure on costs.Citi cut its price target on Thomas Cook to 80p from 120p as it lowered full year 2016/17 earnings per share estimates by 5% and 2% to reflect the weaker-than-expected trading highlighted in the first quarter statement.Citi's 2016 EPS forecasts are around 5% below consensus."Unlike its main peer Thomas Cook does not have a significant hotel and cruise business. This means that as the supply/demand balance for accommodation tightens it does not have a ready source of in house capacity nor a corresponding benefit from higher hotel/cruise profits to offset the cost pressures that the tour operator may see," Citi said.The bank slashed its price target for TUI to 885p from 1,250p."Although TUI guides to at least 10% per annum underlying EBITA growth we think that this likely falls to around 6% pa after allowing for FX and the likely disposal of the fast growing Hotelbeds business," Citi said.It said management appears confident of a good performance this year, despite strong growth in European airline capacity and higher hotel costs as consumers move away from North Africa/Turkey, but risks remain.Citi said the implied multiple on the tour operating business of 7x EV/EBIT does not take account of these risks."Unless tour operators announce further capacity reductions (possibly with upcoming results), we think both companies could test trough multiples again, pointing to further downside." WANdisco's 'buy' rating and target price at 245p were left unchanged by Investec after the software developer reported a narrower loss in 2015.Losses before interest, tax, depreciation and amortisation (EBTIDA) were narrowed to $16m from $17.9mRevenues were down very slightly to $11m from $11.2m, with a loss before tax trimmed to $31m from $39.4m.The AIM-listed group's cash burn of $34.6m saw the $26m cash call in January last year dwindle to a year-end bank balance of $2.6m.Since then, though the company said it has slashed annual run-rate costs as of this month to roughly $25m, it revealed it has made the first drawings on its $10m revolving bank facility in recent weeks.The company continued to strike a confident tone, having more than doubled its customer base from 10 to 26 and enjoying improved sales bookings in its application lifecycle management (ALM) business towards the end of the year."Full year revenue, EBITDA loss and net cash are all in line versus our estimates revised at the trading update stage," said Investec analyst Roger Phillips."The incremental news in the statement is positive, in that run-rate costs have been reduced to around $25m as at the end of March. For full year 2016 estimates, we leave revenue unchanged, but upgrade EBITDA loss (now $10m loss versus $13.6m before). Net debt improves to $8.1m ($9.0m), with the group's $10m debt facility being utilised as of the first quarter 2016."Investec sees the company's public cloud migration as potentially a major driver.The group is now layering hyperscale public cloud providers such as Amazon Web Services, IBM, Microsoft and Google.WANdisco's Fusion product speeds up and protects transactional data replication during and after cloud migrations, Investec said.