Tuesday, 16:00 GMT
Here’s what’s happening
WPP is leading the advertising agencies higher after Dentsu of Japan reported an acceleration in fourth-quarter organic earnings growth at its international division. Dentsu forecast global advertising spend to grow 3.6 per cent in 2018, up from 3.1 per cent growth last year.
Tui has hit a record high after management said trading had been as expected and reiterated a target of delivering at least 10 per cent ebita growth in 2018. First-quarter results from the package holiday specialist, seasonally its least important, were held back by hotel disposals and the bankruptcy of Austrian airline Niki.
Annual profit growth of 10 per cent “feels increasingly de-risked to 2020 given investment into hotel and cruise content”, said Panmure Gordon, which has been a long-term seller of the stock. “Our caution on Tui concerns increasing capital intensity required to sustain profit growth. To date that concern has been overlooked by the market as investors focus on avoiding earnings risk.”
Telenet, the Liberty Global-controlled Belgian cable broadband group, has fallen after unexpectedly postponing dividend payments. Analysts said the decision was likely to be because Liberty would have to pay taxes on the dividend due to US tax reform.
Inmarsat is under pressure after HSBC analysts cut earnings forecasts for the satellite operator to reflect currency headwinds and questioned whether the current dividend is sustainable.
HSBC told clients: “Because of the high level of capital expenditure and inflated operating expenses, Inmarsat’s dividend in cash is not covered . . . If Ligado, the 5G project in the US that pays $125m per annum for Inmarsat’s spectrum, was to consider a suspension of its payments to Inmarsat, we believe Inmarsat would have no other option than to drastically cut the cash dividend.”
Reassuring guidance with in-line results has lifted Pendragon. The car dealership, which warned on profits in October, guided for the new car market to shrink by more than 6 per cent this year but remained comfortable with full-year expectations.
“After the challenging third-quarter performance, the statement comments that used and new margins returned to more normal seasonal levels, which should reassure that the pricing issues were one-off in nature,” said Jefferies. “The lower tax rate is a nice extra and should drive up consensus EPS [by] mid-single digits even if adjusted profit-before-tax estimates are unchanged.”
US-listed home security group ADT, whose flotation last month flopped, is edging higher after at least five brokers issued “buy” recommendations. Merrill Lynch, Morgan Stanley, Goldman Sachs, Citigroup and RBC all used the expiry of a post-float research blackout to issue positive advice on the stock. Credit Suisse was the only outliner, with a “neutral” call.
Citi called ADT “alarmingly under-appreciated”, telling clients: “Despite a shrunken subscriber base, we think the shift towards higher return revenue sources (commercial), coupled with continuing efficiency gains (residential), and opening new, less capital intense product channels (DIY), will lead to an achievable mid-40s levered and mid-teens unlevered free cash flow compound annual over the next three years. Over time, we expect investors to ‘see the proverbial forest’ and begin to appreciate strong upside leverage from continued turnround execution and sustainable increases in returns on capital.”
Under Armour has surged after quarterly results beat expectations thanks largely to international growth. The sportswear group said revenue was up 4.4 per cent for the quarter to $1.37bn, beating a consensus of $1.31bn, while break-even adjusted earnings matched forecasts.
● Morgan Stanley downgrades BP to “equal weight” and raises Total “overweight”, as well as upgrading Statoil to “equal weight” from “underweight”. The broker’s call was based on Total and, ultimately, Shell outpacing BP on dividend growth.
“Despite Brent averaging merely $54 a barrel last year, free cash flow rose to its highest level since 2009, return on average capital employed is improving rapidly and is on track to converge to its long-run average by 2019/20, and gearing is falling steadily.” Unexpected dividend rises from Total and Statoil therefore “mark an important inflection point” for a sector that has tended to “find a new equilibrium such that new projects can go ahead again and the majors can maintain their dividends”.
● Barclays starts coverage of engineer Smiths Group with an “overweight” rating and £18 target price. Cash flow is improving, pension risks are diminishing and active portfolio management has accelerated under new management. Barclays said: “We see this business as undergoing a material change under the current management team. Since Andy Reynolds Smith took over as CEO in 2015 we have seen a return to active management of the portfolio, an operational improvement seen through much improved cash dynamics and a much greater focus on organic growth.”
● JPMorgan Cazenove starts coverage of Rocket Internet with “overweight” advice and a €29 target price.
“At the current share price level, Rocket Internet is valued at €3.7bn — which only reflects its stakes in the listed entities Delivery Hero/HelloFresh and its €1.6bn end 2017 net cash balance. We believe the market giving NIL value to Rocket’s remaining portfolio of proven winners and other ventures is too prudent. We see a potential IPO of online furniture player, Home24 (as indicated in Manager Magazin, January 18) as the next catalyst to unlock value and expect an encouraging update at the upcoming 2017 results presentation.”
● In brief: Dixons Carphone upgraded to “buy” at Cenkos Securities. Imperial Brands cut to “neutral” at Piper Jaffray. Tate & Lyle raised to “buy” at Kepler Cheuvreux. Oddo upgrades easyJet to “buy”. Nostrum Oil & Gas raised to “buy” at Renaissance Capital. Aena raised to “neutral” at JPMorgan. HSBC upgrades BASF to “hold”. Natixis raises BNP Paribas to “buy”.
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