Broker tips: GlaxoSmithKline, Ted Baker, Pearson, Centrica
By Iain Gilbert
Date: Wednesday 05 Dec 2018
(Sharecast News) - Barclays has cut GlaxoSmithKline to 'equalweight' from 'overweight' and trimmed the price target to 1,600p from 1,750p after the pharmaceuticals giant announced earlier in the week that it was selling its Horlicks business and other consumer health brands to Unilever for £3bn and buying US drug company Tesaro for $5.1bn.
It said that while the share price reaction to the Tesaro deal was "too severe" as it fails to attribute any long-term net present value accretion from the deal, it reflects the "near-term truth of significant earnings per share dilution".
"In context of generic Advair looming, softening HIV trends, Shingrix hitting defined capacity constraints and a lack of meaningful R&D catalysts before H2'19 that will compound 2019-20's outlook challenges," it said.
Barclays said that not only will the deal defer the return to EPS/dividend growth but it now seems clear that next year will be a down year before 2020 brings us broadly back to where 2018 will end.
"Broader macro/Brexit concerns may continue to offer some short-term support, but with GSK having been one of 2018's better performers we cut to EW post-January's upgrade."
Barclays said the stock's valuation remains appealing, but 2019 will likely see better chances to revisit the story.
Analysts were divided in their opinions of Ted Baker's recent woes on Wednesday, with HSBC cutting its recommendation on the stock as Liberum reiterated its positive stance in the aftermath of the "forced hugging" scandal.
HSBC cut the stock to 'hold' from 'buy', slashing the price target to 1,450p from 2,900p as it argued there was limited visibility as to when market uncertainty over Ted Baker's leadership will be resolved after the company announced a formal investigation into the unwanted advances of CEO and founder Ray Kelvin.
Nevertheless, the bank said it remains fundamentally a good company, which is well positioned to transition to online.
"A high proportion of variable costs in its retail division (e.g. concessions) and minimal exposure to bricks and mortar assets (i.e. 23 stores in the UK) are key strengths," it said. "This substantially differentiates Ted Baker, reducing the risk attached to declining store sales densities. Furthermore, sales densities are not a reliable indicator of top-line growth and need to be considered alongside online."
Liberum approached Ted Baker's recent troubles from a different angle, reiterating its 'buy' rating on the stock as it said the 43% de-rating over the past 12 months means it now offers a "very strong buying opportunity".
"The current 12-month forward price-to-earnings ratio of 9.3x is just too low for such a high-quality business," it said. "While recent news flow is unhelpful, we believe the impact on the group's brand strength and longer-term growth prospects is likely to be minimal."
Liberum said trading conditions have been subdued, but Ted's positioning as a global lifestyle brand leaves it far better placed than most.
"If the current low valuation persists, Ted could look increasingly attractive to an acquirer," it added.
Liberum reiterated its 'sell' rating on education publisher Pearson on Wednesday, saying that disappointing second-quarter results from Barnes & Noble Education in the US provide warning signs.
Shares in Barnes & Noble Education tanked on Tuesday after the company's second-quarter numbers fell short of analysts' expectations.
Liberum said that as one of the largest US higher education college bookstore chains, its numbers give a good read-across to Pearson's US higher education business, which the brokerage reckons is at least 35% of profits and its main structural concern on the company.
"Comments about worsening price deflation in textbook sales and evidence of higher returns should send a particular alarm warning about Q4 US Higher Ed textbook trends," it said.
Comparable second-quarter textbook sales at BNED fell 8.1%, which was worse than the company expected, while the wholesale textbook distribution business, MBS, saw sales fall 10% year-on-year.
Analyst Ian Whittaker said the results point to a weaker fourth quarter in the higher education market, and more crucially, signal that returns could be worse than expected, which would put pressure on Pearson's guidance.
Analysts at UBS downgraded Centrica to 'neutral' on Wednesday, highlighting a "more balanced" risk/reward scenario in the wake of the FTSE 100 constituent's most recent trading update.
The Swiss broker said that the energy supplier's trading update showed that conditions were tougher than it had initially thought, with the loss of large customers at British Gas continuing alongside sliding production volumes in the firm's asset businesses and unstable commodity prices.
"All this puts pressure on the strategy, and we no longer see a skew of risks to the upside," said UBS as it dropped its target price on Centrica to 135p from its previous 165p.
UBS said it was particularly concerned about the fact that Centrica had lost 2m accounts in as many years, "intense" competitive pressures in the US market, outages in nuclear and some yet-to-be-identified problems upstream.
"Overall, we think management can (just...) reach the low end of cash flow targets, but if anything else goes wrong the dividend is clearly at risk."
The broker did note that there was upside to be had should commodity prices improve and if the US surprised "positively" but noted that, as it stands, the new rating felt like "the upside case, not the base case".
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