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Broker tips: Cobham, Spire Healthcare, Ocado, Associated British Foods
Following a challenging period for technology and services firm Cobham, analysts at Morgan Stanley now see an improved risk-reward case on the horizon.
Morgan Stanley thinks Cobham's current management team have successfully "stabilised" the group's performance, with necessary costs "sunk" and careful measures taken to aid operational delivery.
Together with the start of multi-year up-cycles in its core defence and aerospace markets, the broker believed that consensus was now underpinned and that some of the company's other niche exposures also appeared to be near a bottom.
Thus, MS felt believed that Cobham's earnings potential out to 2020 had not been factored into its current share price.
The broker noted that structural headwinds in the group's portfolio had largely played out by 2015 when Cobham generated 16% margins, which included underperforming businesses that have since been divested.
"We view 16% as closer to normalised margins and see scope for them to grind higher and support EBITA growth. On 10x 2020e EBITA, we think little of this is priced in," MS said.
MS acknowledged residual risks around Cobham's KC-46 aerial refuelling tanker programme but stated that current provisions for cost overruns were conservative and that it saw "several mitigating factors" that could avert any potential delayed performance penalties.
All in all, MS upgraded Cobham from 'equal-weight' to 'overweight' and upped its target price on the "currently under-earning" firm to 150p from its previous 115p figure.
After Theresa May announced a 10-year plan that included a £20bn a year increase in funding for the NHS by 2022, analysts at Berenberg believe that the medium-term potential acceleration in NHS volume growth for Spire Healthcare "outweighs longer-term potential lower self-pay growth".
The changes should increase the annual funding uplift by around 1% a year from the level over the last two years, and by 2% from increases over 2010-2015, which Berenberg said should serve to ameliorate the pressures on the parlous state of the NHS's finances.
The broker said that, in the very near term, little change is expected in NHS referral patterns and self-pay demand, until April 2019, with the recent decline in NHS block contracting revenues more likely to continue.
But in the mid-term, hospitals may choose to utilise some of this funding to reduce elective waiting lists, which "should benefit independent hospital operators" such as Spire, the analysts said. "The NHS's own capacity is dependent on infrastructure investment, which is likely to remain too low, and personnel, which take time to recruit."
But Spire's five-year strategy "remains achievable", with management expecting a 2% annual average decline in NHS, 14% annual growth in self-pay, and 3% annual growth from private medical insurance, as well as growth from Spire's new hospitals in Manchester, Nottingham and St Anthony's in South London.
"There is a chance that the funding increase could improve the NHS outturn over this period, although at the expense of slower self-pay growth, but Spire's £200m+ 2022 EBITDA target should still be achievable, in our view."
Berenberg's 290p price target is based on nine times EBITDA, which is the lowest multiple of its peers due to recent earnings volatility and momentum.
With exclusivity signed for the US, there is limited potential at Ocado for new customer fulfilment centres over the next five years and the share price has baked in the announced deals, Bank of America Merrill Lynch said on Monday as it cut the stock to 'underperform' from 'buy'.
The bank said that with the US market signed and no near-term plans to expand into a new continent - especially Asia - the debate on Ocado is shifting from licensing potential to execution.
"We are not concerned and are changing our fundamental view. We still see Ocado's technology as a unique grocery online solution. But the next three years are about delivering results and validating the economics rather signing new partnerships from one or two incremental customer fulfilment centres (CFCs)."
The bank said that at 1,040p, Ocado's share price is already factoring in a smooth delivery for Ocado Smart Platform and one new country. Consequently, it sees few catalysts at this level, hence the downgrade.
Overall, Bank of America sees OSPs potentially growing from 23 CFCs to more than 40 in the long run. However, this won't happen before 2028 at the earliest. As a result, the benefit is back-end loaded and hinged mainly on Kroger's market opportunity, given the exclusivity it has in the US.
Ocado announced last month that it had signed a partnership agreement with US retailer Kroger under which its technology would be used in the US exclusively for grocery and other activities related to food distribution.
Associated British Foods was on the rise on Monday after RBC Capital Markets lifted the stock to 'outperform' from 'sector perform' and bumped the price target up to 3,100p from 2,800p, citing potential for Primark's like-for-like sales to improve.
"We see margin upside driven by better buying and inventory control and we think concerns over performance in the US have been overdone," the bank said.
RBC said Primark's LFL sales should return to positive territory in the second half of this year and FY19 thanks to an ongoing strong product offering and less competition from the likes of New Look, Pep & Co and Lefties.
RBC noted that Primark's entry into the US in 2015 created a lot of excitement but said its performance was affected by a lack of brand recognition and as it has taken time to adapt its offer for the US market.
"We think Primark has settled on the right sort of format now as a mid-sized box and its next opening in Brooklyn, New York, should be an important milestone for the brand there. We think ABF is committed to US expansion for Primark and that its sales densities should improve as it gains brand scale there."
In addition, the bank argued that Primark should benefit from dollar buying gains in the second half of this year first half of 2019, strong inventory control and strong volume growth which increases its bargaining power with suppliers.