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Broker tips: Royal Mail, Kingfisher, Bovis
Royal Mail was under the cosh on Friday as Berenberg downgraded the stock to 'sell' from 'hold', saying risks to the company's growth and profitability outlook are increasing once again.
"Regulatory change presents another headwind for mail volumes, while intense competition threatens revenue growth in parcels. Combined with various other cost pressures, we see little profit growth over the next three years."
Royal Mail highlighted the risk from the adoption of the GDPR and said that the rate of volume decline might be at the upper end of the usual 4% to 6% range.
Berenberg said this was likely to prove to be a "best case" scenario.
"Companies are very uncertain about how to comply with GDPR and there is a strong possibility that they will temporarily rein in their marketing activities rather than risk breaching the regulations. We estimate that a 20% reduction in marketing volumes could hit overall mail volumes by an incremental 2%, or about £80m of revenue."
The bank cut its FY19 and FY20 earnings per share forecasts by 14% and 12% to reflect its concerns about growth and margins. As a result, Berenberg is now 7% and 8% below consensus.
"We think much of the recent re-rating will likely reverse, if trading disappoints," it added, keeping its 460p price target on the stock unchanged.
Following the sale of Homebase by Australia's Wesfarmers, analysts at Jefferies saw "materially supportive" consequences for not only B&Q and Kingfisher but the British DIY market as a whole.
Jefferies welcomed Wesfarmers move to sell its Homebase/Bunnings UK to turnaround specialist Hilco for £1, confirmed overnight, which will see the removal of the Bunnings brand from the UK.
Wesfarmers' most recent updates detailed a mid-teens decline in like-for-like sales at, and a contraction in its operating margins of close to 20%, after the Australian group "significantly weakened" its presence in the showroom categories in favour of aggressively pursuing the harder end of the DIY market.
Jefferies said that, ultimately, the major risk had been that Wesfarmers would be "irrational" and back a significant investment to rebrand Homebase stores into Bunnings. However, Friday's news should see B&Q's biggest competitor, and arguably the "only alternative" to retail customers in the UK large-sheds DIY market, become much more sensitive to short, and mid-term margin and cash flow challenges.
All in all, Jefferies reiterated its price target and 'buy' rating on the UK firm.
Analysts at Deutsche Bank were by no means disappointed by Bovis at the housebuilder's capital markets day on Thursday, upping their target price on the shares as a result of a "growing indication of upside" and evidence of its chief executive's "infectious enthusiasm" having filtered down the organisation.
Deutsche highlighted that of the three key drivers of Bovis' stock, all had gained traction.
With a further 1% added to Bovis's margin initiatives, Deutsche said the firm was moving towards the top end of its margin target for 2020 of 24.8%, which was 7.3% ahead of consensus estimates and 4.3% ahead of the broker's own estimates, despite the analysts' upwards revisions to their estimates contained in the same report.
The German bank also saw a growing indication of upside to Bovis' completions target towards 4,500, from its previous 4,000 mark, and was confident the FTSE 250 firm was capable of reaching the top end of its estimates for balance sheet optimisation at £250m.
"With the strong stock performance in the past months, Bovis now trades in line with the sector," Deutsche said.
The bank upped its target price on the shares from 1,411p to 1,450p while reiterated its 'buy' recommendation.