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Broker tips: Fevertree, FirstGroup, Burberry

By Iain Gilbert

Date: Friday 22 Jun 2018

Broker tips: Fevertree, FirstGroup, Burberry

(Sharecast News) - Analysts at Jefferies see the US as the largest growth opportunity for 'posh mixers' maker Fevertree.
Given premiumisation trends in spirits culture, Jefferies' proprietary US bartender survey found conditions were "in place" for Fevertree to push itself to the top of the premium mixers category.

"We would acknowledge that success in the UK is no guarantee of success in driving the premium mixers category in the US. Unlike the UK, where FEVR growth coincided with (or helped to stimulate?) the renaissance in high-end gin, drivers of the US will be both tonic and non-tonic led," Jefferies said.

While Jefferies noted that this won't happen overnight, success in the US could lead to a doubling of Fevertree's base, leading the broker to increase its price target on the AIM-listed firm from 3,000p to 4,000p.

Jefferies said there was scope for earnings per share momentum given the warmer than usual weather experienced throughout the second quarter, something the broker believes the market had partly priced in, but noted that if Fevertree was able to even partially emulate its UK success in the US, the firm would be well worth an incremental 3,000p a share.

In addition to the new price target, the broker reiterated its 'buy' rating on Fevertree shares.

Transport operator FirstGroup got a boost on Friday as Goldman Sachs initiated coverage of the stock at 'buy' saying the market discounts the underlying value of the company's individual assets.

Goldman noted that over the past 12 months, FirstGroup has underperformed the FTSE by around 40%, reflecting poor performance at Greyhound in the US and its UK rail franchises. This underperformance follows a turbulent decade for the group that began with the acquisition of Laidlaw in 2007 and saw an expansion into five divisions with limited synergies.

After a tough end to FY2018, management announced a strategic review of the business and hired consultants to assess Greyhound, GS said.

"Given the limited synergies within, and complexity of, the existing business structure, we believe the market discounts the underlying value of the individual assets; as such we see material residual value and believe this could be released in the event that the strategic review (or other catalyst) were to lead to portfolio restructuring/optimisation."

To capture this, the bank has included in its 106p price target a 30% weighting to a transaction multiples-based sum-of-the-parts, reflecting the potential value, including control premiums, of individual assets to external buyers. The remaining 70% of its price target is based on EV/EBITA and GS sees around 30% potential upside.

Goldman said it expects management to provide more colour on the review with its 1H FY19 results in November.

"While we expect the 1H FY19 trading environment to remain challenging, with ongoing margin pressure at Greyhound and at the UK Rail TPE franchise, we believe this is already reflected in the share price."

UBS sees a "potential long-term improvement story" at Burberry, upping its target price on the fashion company but keeping its 'neutral' rating until more evidence emerges to justify a premium share price.

Assessing pricing, product and internal morale for Burberry as new CEO Marco Gobbetti begins his strategic refresh of the high fashion retailer, the Swiss bank said that, while the key collection from the new creative director Ricardo Tisci won't land until May/Jun 2019, it had found "rising employee views".

This implies that small product launches for now "have gone well" and suggest retail like-for-like growth upside. Analysts now forecast 4% LFL sales growth for the first quarter of the new financial year, with Burberry having ended the last financial year with quarterly growth of 2%.

Burberry shares trades at 25.1 times calendar 2019 expected earnings per share, around a 66% premium to the European market. Over history, the analysts note that Burberry's valuation has been correlated to retail organic sales growth and at the current level, "we believe the stock requires an acceleration in Q1 retail like-for-like to sustain its multiple despite excitement building ahead of the new creative director's first show in September".

The current p/e rating suggests "much is already priced in", so apart from upping the target price to 2,150p from 1,900p, the analysts sit back "waiting for better evidence of a recovery".


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