Broker tips: Asos, Capita, ConvaTec
By Iain Gilbert
Date: Monday 20 Jan 2020
(Sharecast News) - Morgan Stanley downgraded shares of online fashion retailer ASOS to 'underweight' from 'equalweight' on Monday, cutting the price target to 2,000p from 2,100p as it argued that consensus medium-term forecasts are "still much too high".
It noted that consensus is currently expecting ASOS' earnings per share to increase by 160% over the next two years and said this was "very optimistic".
"FY 2018/19 was very challenging for ASOS, with the company delivering only half the EBITDA, and a quarter of the earnings, that consensus envisaged at the start of the year. The market, however, is predicting that margins recover rapidly and that by FY 2021/22 earnings will be at all-time highs," MS said.
The bank said many investors see 2018/29 as having been affected primarily by operational problems.
"We disagree. In our view ASOS's problems last year were entirely consistent with much longer-term trends, with its business model being challenged increasingly both by slowing growth in the online apparel market and by rising returns rates," it said.
As a result, MS expects that there will be only a very limited earnings recovery and that consensus earnings per share forecasts for 2021/22 are around 40% too high.
UBS downgraded its recommendation on shares of outsourcer Capita to 'sell' from 'neutral' following a re-rating of more than 50%.
The bank, which lifted its price target to 140p from 130p, said: "Capita is undergoing a multi-year turnaround, but a significant re-rating through 2019 and consensus already appear to price in management achieving targets this year."
UBS said it was "doubtful" about the turnaround, adding that it still expects negative organic growth until FY 2022, which will significantly weigh on cash generation.
"We believe internal improvements will take longer than expected to translate into positive external growth, while the wider market backdrop continues to deteriorate," it said.
UBS said its latest 'evidence lab' analysis of employee satisfaction trends suggests internal rebuilding is going well, with Capita's score improving by around 32% since mid-2018.
However, headwinds from a worsening market backdrop may be rising. "UBS Evidence Lab CFO surveys indicate a weak UK private sector for contract awards, ii) public sector tendering pipelines remain slow, and iii) UK staffing trends suggest the outsourcing sector could see falling volume-related work until late-2020," it said.
"It took Serco six years under a new CEO to return to growth; consensus expects Capita to do the same in less than three years."
JPMorgan Cazenove downgraded its stance on shares of medical products maker ConvaTec to 'underweight' from 'neutral' on Monday, cutting the price target to 168p from 171p as it pointed to an unattractive risk/reward.
It noted that after posting a 79% gain since the 2018 results and the announcement of the new restructuring plan, ConvaTec now trades at all-time highs relative to the UK index and the European medical technology sector.
It pointed out that the shares are trading higher relative to indices than they did at the time of IPO.
While the equity story is similar to the time of IPO - defensive growth with margin expansion - the starting point for margins is significantly lower, it said.
"In terms of opex and investment, while competitors (notably Coloplast) have made significant strides, ConvaTec has stood still or taken a step back. This is most obvious in R&D and product development, where ConvaTec's pipeline is at an all-time low.
"In our view, the most significant factor in the turnaround will be generating sales growth close to end-market growth (around 4%); with a depleted product pipeline, apparent limited growth in salesforce and more intense competition this looks challenging. Initial comments from the CEO suggest that further opex investment (beyond the transformation plan) may be required."
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