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Broker tips: On the Beach, Britvic, Kingfisher, Bunzl
The fall in On the Beach's shares is a "compelling" buying opportunity for a structural growth stock, Berenberg analysts said as they reiterated their 'buy' rating on the shares.
The online beach holiday company's first-half results on 10 May were slightly weaker than expected but the shares decline of more than 25% is overdone, Berenberg said. Management said disappointing growth was caused by higher airline seat prices after the collapse of low-cost carrier Monarch. Airfares have gone back to normal and this should help On the Beach.
The company, which lets customers put together their own package holiday from thousands of hotels and flights, is taking market share and is investing in marketing without expenses increasing as a percentage of sales, the analysts said.
More than 40% of the UK holiday market is yet to shift online and with cash in the bank On the Beach can grow without much more capital. Investors also have a free option on the company expanding overseas through its nascent international operation.
"OTB remains a high-margin, high-return structural growth story, and the pull-back creates a compelling buying opportunity," the analysts said.
The analysts kept their 'buy' rating for On the Beach and left their price target unchanged at 600p a share. At the time of publication, the share price was 473p.
Societe Generale upgraded drinks maker Britvic to 'buy' from 'hold' following the company's interim results on Wednesday, which it said were a beat.
The bank said Britvic reported "strong results all the way down the income statement", with revenue of £733.2m, EBIT of £80.5m and earnings per share of 21.2p all higher than consensus expectations of £721m, £77.9m and 19.4p, respectively.
In addition, SocGen said the company's sugar tax strategy "plays to Max strength".
"Britvic has chosen not to launch different pack sizes for sugar-added and sugar-free variants, with a higher shelf price for Pepsi than for Pepsi Max. This supports the spirit of the legislation and also plays to its strength, with Max gaining of cola (up 200 basis points value share in the first half) at the expense of Classic and Zero Coke.
"We think the sugar tax will have a minimal adverse impact on profits, and that momentum in the business is strong."
SocGen kept its 12-month price target on the stock unchanged at 945p.
"We have worked closely with customers ahead of the levy introduction to ensure soft drinks shelf and feature space is maintained. We are beginning to see an increased focus on low and no sugar brands, where Britvic has an advantaged portfolio, due to our long-standing reformulation and innovation programme. Recent competitor reformulation and promotional strategy appears, at this stage, to be broadly as we anticipated," the company said.
Kingfisher lost out on sales due to the Beast from the East snow and is not likely to recover all of this seasonal weakness later in the year, RBC Capital Markets said.
RBC said the first-quarter update was softer than expected, with like-for-like sales down 4%, below consensus expectations, with snow disruption in major markets estimated to accounted for three percentage points of the decline.
Analysts, who think the UK home improvement market has become more challenging in recent months, expect the Q1 disappointment to lead to consensus PBT downgrades in the order of 2-3%. "Major competitors Wickes and Bunnings have their own company-specific challenges but even so as market leader we don't think Kingfisher will be immune from this trend."
There were brighter notes, RBC, which has a 'sector perform' rating on the shares with a 315p price target, noted that business disruption appeared broadly in line with CEO Veronique Laury's turnaround plan and new ranges are "clearly having a positive impact" on the performance of Brico Depot in France.
Furthermore, the UK market weakness is partly offset by Kingfisher's international exposure. "We are concerned about ongoing disruption and execution risk with the transformation plan, and market expectations medium term, but we think the story could improve again as France online improvement comes through in the summer and as we should see some capacity withdrawal in the UK."
With the shares trading at just over 13 times full-year earnings, broadly in line with the UK general retail sector average, but with higher-than-average EPS risk, in RBC's view.
Lastly, Goldman Sachs downgraded Bunzl to 'neutral' from 'buy' following outperformance, but sad it still views it as a long-term earnings compounder.
The bank noted that since being upgraded on 24 January, the shares are up nearly 19% versus a 0.5% drop for the FTSE World Europe.
"The shares have re-rated following a strong 1Q trading update, which showed no discernible negative impact from online competition. Our analysis suggests that this bond proxy stock now trades at a multiple that is broadly consistent with forecast yield expectations."
Goldman highlighted Bunzl's earnings per share compound annual growth rate of 10% over 2005-17, which was fuelled by acquisitions. It estimated that M&A has led to average 10% EPS upgrades for a given fiscal year over the past four years.
"We previously argued that the de-rating Bunzl had experienced due to concerns over online competition and rising yields was excessive," it said. However, following the first-quarter trading update, there is limited further valuation support for the shares, it said.
Goldman kept its 12-month 2,500p price target on the stock, implying 8% upside, which is lower than the sector median upside of 12%.