Broker tips: Standard Chartered, Travis Perkins, Micro Focus

4th Dec 2013 11:45

Investec said it sees a "clear positive outlook" for Standard Chartered in 2014 despite the company saying it expects flat annual revenue.In a trading update on Wednesday, the financial services firm admitted a challenging year had resulted in a significant impact on its performance in the second half and as such income for the full year is expected to be broadly flat on 2012.It said currency depreciation would reduce income and profit growth by around 1%, while costs were expected to rise by a "low single digit percentage".The net interest margin for the group has been "slightly" down on last year, with high levels of liquidity in many of its markets affecting margins.However, Investec recommended a 'buy' rating, saying it sees a brighter year ahead, driven by a sharp re-acceleration in wholesale banking revenues with substantially curtailed margin and "own account" headwinds. "Today's news is poor, but the outlook, underpinned by a strong pipeline and greater margin stability, appears robust," the broker said."On 9.1 times estimated 2014 earnings per share (EPS), it is the UK's cheapest bank which, in our view, remains an anomaly."Although it lifted its price target from 1,413p to 1,592p, Deutsche Bank was somewhat disappointed with the capital markets day from Travis Perkins, with no mention of a hoped-for cash return and further fuel for market worries for the General Merchanting division. Despite a confident performance from new management, analyst Glynis Johnson bemoaned the lack of "revolution" and said new targets for return on capital employed implied little movement to forecasts. "[Travis Perkins] remains a well-run, well-positioned business. However, with margin upside in its largest division guided to be constrained and increased pressure from fixed price retailers we see more limited scope for earnings upgrades," she said.Trading at over 12.5 times 2015 earnings, she saw limited value in the stock and reiterated her 'hold' recommendation.New Chief Executive John Carter guided to retaining sector-leading margins in its General Merchanting business but no margin expansion, which the analyst said she believed would leave the market disappointed by the lack of operational leverage this implies for this the group's main business, and concerns over the impact on pricing competition from fixed price retailers such as trade DIY and multi-channel competitors on its smaller-customer base. Applications testing-software provider Micro Focus has a very valid business strategy but the company´s strategic decision not to focus on half-year targets means investors have to place a high degree of faith in management´s ability to control the ups and downs in each division, analysts at Investec wrote on Wednesday.That is no mean task in an outfit which delivers over 300 products and has five divisions, which means there are myriad moving parts for investors to try and track. As well, the shares are trading near the broker´s price target of 850p, or 11 times their estimated enterprise value/earnings before interest expense and amortisation (EV/EBIA) multiple, and there is a lack of catalysts to justify a higher multiple. For those reasons, Investec has moved to a 'Hold' on the stock from a 'Buy' previously. Worth noting is that management was at pains at the most recent analyst meeting to highlight the importance of not over-focusing on any one operational data point in a period, Investec explained, as well as offering only modest guidance so as not to introduce forecast risk. Furthermore, the firm´s targets already supprt sharholder returns of between 15% and 20% per year based on cash return and EPS growth.AB