Broker tips: Costain, JD Sports
By Iain Gilbert
Date: Thursday 12 Dec 2019
(Sharecast News) - Analysts at Liberum cut their price target on British construction and engineering company Costain's shares from 350p to 220p on Thursday, following an adverse court judgement in its dispute over a Welsh motorway project.
Liberum pointed out that at the halfway point of the year, Costain had indicated that the Welsh government had effectively appealed the decision on A465. However, the new decision split the responsibility for the design information with no final agreement.
Costain was now in active dialogue about the resolution of the contract but Liberum expected the decision to have an impact of roughly £20.0m on its underlying earnings for 2019 and a £40m impact on year-end cash.
"Management now assumes that the contract is loss-making, which is disappointing given that it is a target cost, cost re-reimbursable contract. Costain has not recognised any profit on the contract," said Liberum.
"Management believes that there is nothing else of a similar nature in the order book. The £20m impact is Costain's assessment of its share of the pain as a result of the arbitration decision."
Elsewhere, Liberum, which kept its 'buy' rating on the firm in place, stated that trading appeared to be in line with expectations despite highlighting "a variety of challenges", including delays on the Smart Motorways project and the transition from AMP6 to AMP7 in water.
The recent slump in JD Sports' share price provides a good buying opportunity, Berenberg said on Thursday, as it hiked its price target to 860p from 800p.
The sports retailer's stock tumbled on Wednesday on news that its largest shareholder, Pentland Group, had sold off 24m shares in the company at 740p each. Berenberg said the weakness was a good opportunity to snap up the shares, of which the bank remains a big fan.
"JD Sports has been the star of the retail and sporting goods space, with the shares up by 110% year-to-date," it said. "JD's exceptional momentum has caught investors' attention, but valuation has come into sharp focus. With some investors fearing JD has run its course, a common pushback is that the company is 'another Foot Locker', which is a global sports-fashion peer that trades at a circa 65% discount to JD."
However, Berenberg argued that the JD premium is justified.
"We think that JD deserves to trade at a healthy premium to Foot Locker. Its greater diversification across product, brand and geography makes it a better-positioned business that is less volatile, faster growing and fundamentally more profitable. JD remains a strong play on the attractive sportswear space, while arguably offering a lower-risk and higher growth alternative to owning a single sports brand."
It added that JD's turnaround of Finish Line in the US continues to offer a compelling growth opportunity.
"Its US entry is not without risks but recent developments are encouraging and management appears more confident about its prospects. Finish Line is outperforming Foot Locker and we expect fewer net store closures than we had anticipated as management accelerates capital-light Finish Line conversions to JD stores, alongside organic JD store openings."
Berenberg has a 'buy' rating on JD Sports shares.
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