Broker tips: Majestic Wine, Burberry, Capita
By Renae Dyer
Date: Friday 30 Sep 2016
(ShareCast News) - Majestic Wine's shares fell on Friday as Canaccord Genuity reiterated a 'sell' rating and cut the target price to 290p from 350p.
The company last Wednesday issued a profit warning, saying it had been hit by the costs of a failed marketing campaign for its Naked Wines business in the US. Majestic said weak growth in its commercial division, which sells wine to businesses, had also weighed on results.
"Majestic Wine delivered an unwelcome downgrade of £4m to fiscal year 2017 pre-tax profit expectations, equating to a around 25% cut to previous consensus forecasts," Canaccord said.
"Despite the company's understandable attempts to reassure investors on the progress in all other parts of the business, the fact that the two culprits - commercial and Naked USA - have been positioned as growth drivers is clearly a source of considerable disappointment."
Canaccord said while management has been targeting double digit growth in commercial, gross margin of 200 basis points in the year to date has seen the top line resolutely flat. As a result, Majestic said this will deliver a £2m hit to earnings before interest and tax in the rest of the year.
"This begs the questions of (a) how much investment is required to grow the business (b) whether competition has strengthened (c) whether the divorce of retail and commercial has adversely affected the latter (even if it does appear to be helping the former) and finally (d) whether the business can actually deliver sustainable (turnover and profit) growth," Canaccord said.
Majestic said the cost of the failed Naked Wines campaign to EBIT is also £2m. Canaccord said its greater concern is the dent to the company's prospects in the US.
"We find it worrying that variances in customer/cultural behaviours across the USA may preclude a standardised national marketing approach, which could in turn raise costs and lower returns on investment."
RBC Capital Markets upgraded Burberry to 'sector perform' from 'underperform' and lifted the price target to 1,400p from 1,200p as it upped its earnings per share forecasts, largely due to a bigger FX tailwind.
The bank said Burberry's equity story is now centred on driving retail productivity in a modest growth environment and leveraging its digital edge to expand into e-commerce.
"FY17 should be difficult but GBP weakness provides a welcome breathing room. We see Burberry moving faster than peers to adapt to millennial consumer behaviour changes and recent management shake-up should support the stock into next year."
The Canadian bank reckons consensus expectations of retail comps - up 1% for the second quarter - look achievable following comments from several peers pointing to sequential improvement in July to August.
Strength in the UK may help to offset weakness in Continental Europe while improving trends in China may mitigate recent price cuts in Asia, RBC said.
In addition, it said the announcement of Marco Gobetti as Burberrry's new CEO was a game changer, changing a management set-up that was not ideal in the current demand environment.
"Mr Gobetti is regarded as a strong retail operator who turned around Givenchy and Celine at LVMH. His arrival should allow Mr Bailey to focus on his chief creative officer role and do what he does best. It is difficult to be negative on Burberry shares ahead of Mr Gobetti's arrival when we examine other management shake-up stories in the retail & consumer sectors."
Goldman Sachs upped its stance on outsourcer Capita to 'neutral' from 'conviction sell' but cut the price target to 771p from 987p following the company's profit warning on Thursday.
The bank said Capita's outlook is poor, but following the 27% drop in the share price after the warning, this is now in the price.
Capita issued a trading statement reducing its outlook for organic growth dynamics and profitability on slower outsourcing trends, lower win rates and slower UK macro.
The group said it now expects underlying 2016 pre-tax profit if between £535m and £555m, which is 11% below the mid-point of company-compiled consensus.
As a result, Goldman cut its earnings per share expectations 9% on average over the next three years.
"We continue to see Capita suffering from lower organic growth dynamics in the UK over the next two years and expect 0.6% organic growth next year.
"We think risks are still overall skewed to downside towards profitability and cash generation as leverage continues to increase driven by FX and cost pick up. That said we think most of the concerns are now priced."
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