Broker tips: Kainos, Boohoo, Centrica
By Iain Gilbert
Date: Monday 16 May 2022
(Sharecast News) - Analysts at Berenberg downgraded software outfit Kainos from 'buy' to 'hold' on Monday, stating the firm was now "stuck in an awkward spot".
Berenberg stated the decision to downgrade Kainos was "a difficult one" and noted that it might seem "odd" given its bullish position regarding the IT services landscape and the fact that it even thinks scope remains for the firm to outperform consensus topline forecasts.
However, the German bank said the challenge was cost inflation, which it thinks has accelerated since the first half of Kainos' trading year and with little ability to renegotiate pricing on contracts already underway, it thinks there is "a strong likelihood" that the company will rebase short-term margin guidance at a lower level.
"While this may be offset by faster growth, it might not," said the analysts.
Berenberg, which also slashed its target price on the stock from 2,100.0p to 1,200.0p, added that while it had opted to leave its estimates unchanged, the risk has now "definitely risen".
"With the shares still trading on a premium valuation too, we think the risk/reward is now more balanced," concluded Berenberg.
Credit Suisse has downgraded Boohoo on growing headwinds, sending the shares in the fast-fashion retailer lower.
The bank, which cut its rating on the stock to 'neutral' from 'outperform', said there were "too many questions" hanging over the online specialist.
In particular, it pointed to high air freight rates and capacity - which Credit Suisse said it did not expect to normalise in the next couple of years - concerns about the US, and growing competition.
It said: "Opening a distribution centre has not resolved Asos' losses in the US, and we are concerned the same applies to Boohoo, as the addition of import tariffs, central costs and a high degree of friction in the supply chain will more than offset stronger sales from an improved delivery proposition."
CS also believes there will be an "increasing amount of regulation around human rights and environmental issues" but stated it was uncertain whether or not this hinders Boohoo or reduces competition.
As well as cutting its rating, Credit Suisse also reduced current year earnings before interest, tax, depreciation and amortisation margin assumptions to 3.5%, compared to guidance of between 4% and 7%, and slashed its target price on the stock to 80.0p from 170.0p.
Analysts at RBC Capital Markets raised their target price on energy services firm Centrica from 90.0p to 125.0p on Monday, citing "exceptional" mid-term cashflow generation and free cash flow yields of roughly 20-25%.
RBC Capital said higher commodities had resulted in "meaningfully higher" near-term earnings per share at Centrica, principally driven by E&P and nuclear.
Although RBC recognised that neither of the aforementioned segments were core to Centrica, as both were limited-life and commodities were likely to moderate, it noted that cash generation cannot be ignored.
The Canadian bank said investable opportunities for Centrica were "hard to identify" at the moment, so it has now modelled four 10%, or roughly £500.0m, in annual buy-backs to show potential returns from investing surplus cashflows.
Under this scenario, Centrica still remains debt-free, highlighted the analysts, but 2030 EPS would progress to approximately 19.0p per share from roughly 9.0p in a no-buy-back scenario.
"The strategic future for CNA remains difficult to predict, and we expect more clarity at H1 results in July. However, cash flow generation is exceptional mid-term with FCF yields, post capex, of ~20-25%. If used for buy-backs, these cashflows can generate meaningful EPS growth," said the analysts, who also reiterated their 'outperform' rating on the stock.
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