Broker tips: G4S, Royal Mail, British American Tobacco
By Iain Gilbert
Date: Thursday 15 Nov 2018
(Sharecast News) - Credit Suisse lowered its estimates on G4S following its third-quarter trading statement, but the Swiss bank said the private security outfit's investment case was still "sufficiently attractive" for it to reiterate its 'outperform' rating on the group.
Credit Suisse said G4S was "lacking momentum", leading analysts to lower their price target on the FTSE 250-listed group from 330p to 250p.
Despite an easier comparative period last year, organic revenue growth in the third quarter slowed slightly relative to the second. "A lack of positive operational leverage and investment into new products has also stymied margin progression."
CS analysts' views on revenue growth and margins are now "much more cautious" given end market challenges and a lack of operational delivery.
"We now assume almost all cost savings are offset by pressure on prices within the business. Earnings and FCF should, however, still grow given modest organic growth and lower interest charges."
While reiterating its 'outperform' stance on the shares, CS said it was cognisant that, after a "series of disappointments", the firm would have to deliver EBITDA growth in the coming year in order to produce a positively rerating.
Liberum analysts reiterated their 'sell' rating of Royal Mail shares on Thursday, stating that the sharp falls in profits across the board were "unsurprising" given an October profit warning.
Analysts also maintained a target price of 250p for the stock and noted that the company faces "significant structural challenges" with little visibility on how the business might be turned around as earnings remain under pressure and set are to fall across the forecasted horizon.
Cost pressures are currently under pressure from rising labour costs, while challenges are also arising from the recently acquired GSO and Postal Express, the businesses on the US West Coast.
The GLS arm, which covers the overseas parcel business, achieved 9% like-for-like revenue growth but saw a much greater reliance on price/mix than in recent periods.
In the UK, parcels and letters business UKPIL delivered a 1% fall in underlying revenue "following the failure to deliver material productivity improvements" as it failed to achieve targets of avoiding £100m in costs.
"We view the current dividend rate and policy as unsustainable, given poor cover and earnings and cash flow, and inappropriate in light of limited earnings visibility and the lack of long-term earnings growth," said a note from the broker.
Analysts at Deutsche Bank slashed their target price on shares of British American Tobacco after reviewing the potential actions that the US Food and Drug Administration might take on menthol cigarettes and litigation risks in Canada.
They cut their target price from 6,000p to 4,000p, although they conceded that they took a "relatively aggressive" view on both those risks.
In such a scenario, their estimate for British American Tobacco's earnings per share in fiscal year 2022 would be 14% lower at 347p, versus 401p previously.
Nevertheless, they stuck to their recommendation to 'buy' the shares.
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