Broker tips: Sports Direct, Ashmore, Electrocomponents

12th Oct 2016 17:35

(ShareCast News) - Sports Direct International was under the cosh on Wednesday as Cantor Fitzgerald cut its price target on the hold-rated stock to 260p from 320p after the company warned last week that full-year 2017 earnings would be hit by recent currency movements."The news is obviously disappointing as not many forecasters would have predicted such further falls in sterling against the dollar," the brokerage said.It also pointed to the fact SPD is radically changing its strategy, adding that this is not without risk.Cantor said it will lead to an increase in debt levels, eliminating the chances of a dividend increase and buyback in the medium term."In the meantime, the company will have difficulty in shrugging off its discount heritage; the currency led downgrade, in our view represents a step down in profitability while the stock is now not 'standout' value on the basis of our revised forecasts."Cantor downgraded its FY17 pre-tax profit estimate to £150m from £185m, taking its earnings per share forecast down to 19.25p from 23.74p.The brokerage said it continues to prefer JD Sports, which it rates at 'buy' with a 1,700p price target, as it has a similar rating, the "unequivocal support" of Nike and Adidas, and clearer visibility on its strategy.Last Friday, Sports Direct said guidance provided in its trading update in September of underlying earnings before interest, taxes, depreciation and amortisation of around £300m was based on a GBP/USD rate of approximately 1.30.In light of recent downward currency movements, it had entered into a hedging arrangement with respect to the GBP/USD rate."Extreme movements overnight resulted in a crystallisation of that rate at 1.19, resulting in a negative impact of approximately £15m on the company's FY17 underlying EBITDA expectation," it said.Sports Direct added that after taking into account the hedging above, if the GBP/USD rate is 1.20 on average for the remainder of full-year 2017, the hit to its FY17 underlying EBITDA expectation would be an additional £20m or so.The statement came after sterling crashed as much as 6% to hit its lowest level against the dollar since 1985. Market participants speculated that it could have been the result of a faulty algorithm or 'fat finger' trade, with low liquidity also thrown into the mix. The plunge also coincided with comments by French president Francois Hollande, who said the EU should take a tough stance with the UK during exit talks. Liberum has upgraded Ashmore Group, removing its 'sell' rating from the emerging markets investor after final results were better than it predicted.Assets under management of $52.6bn was 12% higher than expected, with renewed favourable sentiment in EM resulting in $1.2bn of positive market performance versus forecasts of a big decline.The broker has now listed its AUM forecast 15% per year for the 2017 and 2018 financial years, driven by higher inflow and performance assumptions.Ahead of first-quarter 2017 IMS due on Friday, Liberum noted management's cautious comments about a return to net inflows in the short-term, and so moved to a 'hold' rating.Indicators showed continued growth in EM confidence and while flows seemed to have mainly been into ETFs, with active funds lagging, analyst Justin Bates said this might simply be a timing issue.He increased his earnings per share forecasts by 40% for the current and next year by 2-5% ahead of consensus, implying a p/e ratio of 20 times and a target price of 379p. Electrocomponents got a boost after Citigroup upgraded the stock to 'neutral' from 'sell' and lifted the price target to 375p from 235p.The bank said the change in recommendation reflects earnings per share upgrades and recognises gross margin stabilisation, increased own brand penetration, cost streamlining efforts and greater client focus.Following FX tailwinds and a better-than-expected second-quarter performance, driven by gross margin stabilisation and £15m cost savings, Citi upped its profit before tax and amortisation estimate for this year and next to £102m from £86m and to £113m from £93m, respectively."Electrocomponents has a fully-expensed, high-quality warehouse infrastructure in place in most key markets, with an integrated ERP capability. It seeks to deliver top-line growth by offering a broad product offering, including own branded goods, in combination with increased customer focus and cost leadership," the bank said.However, it noted there is limited upside to its target price.