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Broker tips: Auto Trader, Ocado, Mitie
Exane BNP Paribas downgraded Auto Trader to 'neutral' from 'outperform' on Thursday, cutting the price target by 14% to 370p as it takes a more cautious view on the group's cyclical prospects.
It said the shares have performed strongly since the IPO, driven by strong execution and healthy earnings revisions. However, the stock has de-rated in the last 18 months.
Exane said it was turning more cautious on the UK used car market, with negative implications for Auto Trader. It now forecasts a tough used car market backdrop for 2018/19, driven by diesel uncertainty, which it reckons will weigh on the company's top-line growth in FY19.
Exane noted that used car transactions had declined since the second quarter of 2017, breaking with the historical correlation with lagged new car supply, said that its tracking suggests that this challenging backdrop is now dragging on Auto Trader stock, which is a key growth level for the company.
Exane cut its group FY19/20 organic revenue growth estimate from 7%/7% to 4%/5% and said it expects the company to strike a more cautious tone on the outlook in June.
"Despite challenges, Auto Trader is well placed to prosper longer term. We see little risk of major reinvestment needs or material web traffic share loss. However, we fail to see catalysts for outperformance nearer term and downgrade to neutral."
Analysts at JP Morgan downgraded their recommendation on Ocado shares following their recent sharp outperformance versus the sector, which they argued was pushing the valuation envelope too far.
Over the past six months, they had climbed 76%, on the back of the addition of two new partners for its Solutions arm, Casino and Sobeys, versus an average gain of 0.4% for its sector benchmark.
True, visibility on future sales growth was "arguably high", but that had pushed the stock's EV/EBITDA multiple to 36 times, implying a compound annual growth rate for operating profits for between 2018 and 2020 of 25% - the highest ratio in the European Internet space.
So now, and with their own estimates in-line with the company-compiled consensus, they downgraded their recommendation from 'overweight' to 'neutral' as they waited for a better 'entry-point'.
Nevertheless, they "strongly increased" their mid and long-term growth estimates, in particular at its Solutions arm, leading to an upward revision to their target price for the shares from 390p to 505p.
Among the main drivers of the online grocer's sales, they mentioned its low share of UK household penetration, that increased automation at its fulfilment centres would solve capacity constraints, higher cash generation at its CFCs as they mature and greater deal momentum in Solutions.
Outsourcer Mitie got a boost on Thursday as RBC Capital Markets lifted its stance on the stock to 'outperform' from 'sector perform', although it cut the price target to 200p from 210p.
"There is still much to do at Mitie and the outsourcing sector has developed an unnerving consistency to disappoint. That said, the group looks to be focused on the right things (clients, costs and cash), has a market leading position and is not reliant on the public sector."
RBC said that assuming the company's £45m cost-saving programme, Project Helix, begins to pay off and the medium-term margin targets become more realistic, then there would be significant upside to its forecasts.
The bank said that while Mitie's end markets remain highly fragmented and with the demise of Carillon and question marks against other providers, there should be the opportunity for scale players such as Mitie to take market share.
It also likes the fact that Mitie is much less reliant on the UK public sector than its peers. The sector, an area of the market where RBC sees continued risk in the near term, accounts for around 25% of Mitie's group revenues.
"This turnaround will not be without its challenges, but if Mitie can navigate a slow market and overriding concerns about its balance sheet, this could prove to be an attractive entry point."