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Broker tips: Sports Direct, Unilever, ITV

By Oliver Haill

Date: Friday 20 Jul 2018

Broker tips: Sports Direct, Unilever, ITV

(Sharecast News) - RBC Capital Markets upped its price target on Mike Ashley's Sports Direct to 360p from 325p due to a better outlook for FY19 and lower net debt, following the company's results on Thursday.
It said the stock's valuation already discounts a solid earnings recovery, hence it remains underperform.

RBC said full-year revenue was a little soft and inventories were up 30% on the year, reflecting a tougher end to the year and a build of more premium product. Gross margin was weaker than expected, reflecting higher inventory provisions, but costs were lower due to provisioning for onerous leases and litigation and more automated warehousing.

"We think SPD should be able to deliver double-digit EBITDA growth in FY19 due to a good World Cup and as it is now well covered on dollar hedging, at circa $1.36 for FY19 and circa $1.41 for FY20 versus circa 1.30 for FY18.

"However we think valuation already reflects a robust recovery in earnings. We believe SPD should earn mid to high twenties earnings per share over the next two years which puts it on a CY19E price-to-earnings of close to 15x, ahead of the sector average of 14x."

Unilever has done more than its competitors to overhaul its business but the market has not recognised this, Berenberg analysts said as they raised their target price for UK shares of the Marmite and Dove soap maker.

Unilever's 1.9% organic sales growth was slower than expected at the company's second-quarter results, Berenberg's analysts, led by James Targett, said. But volume growth of 2.2%, excluding the effect of a strike in Brazil, is ahead of the market and global peers and cost savings are producing results.

Berenberg restated its 'buy' rating on Unilever and increased its target price on the Anglo-Dutch company's UK shares to 4,800p from 4,700p. Berenberg left its target on Unilever's Netherlands-listed shares unchanged at €54.

The US market is tough but group margins widened as efficiency measures outweighed inflation. Berenberg's forecast for 3.3% annual organic growth and 4.1% overall growth "looks realistic", the analysts said. Results will get a boost from the sale of Unilever's spreads business, which was a drag in the second quarter.

"We think Unilever has taken the biggest steps among peers to increase its agility, reduce costs, embrace digital channels and future-proof its portfolio, which is not reflected in valuation," Berenberg said.

UKTV, which is 50% owned by the BBC, will withdraw its channels from broadcaster Virgin Media on Saturday after failing to agree on retransmission fees, which saw ITV shares perk up on hopes that it could increase its own fees.

Virgin Media, which also in negotiations with ITV, said the BBC had a "broken business model" after talks collapsed with UKTV, which is jointly owned by US cable network Discovery.

The BBC had been offering to renew the broadcast rights deal for to its UKTV channels but has continued to hold backs the video-on-demand rights to its programming, instead selling them to the likes of Netflix, which Virgin Media felt was no longer acceptable as viewers expect to be able to watch shows on demand.

"The problem is the BBC does not grant the UKTV digital rights with its TV shows which leaves it somewhat stranded as a linear dinosaur in an on-demand modern world," said David Bouchier, Virgin Media's chief digital entertainment officer.

"Part of a commitment to audiences has to be allowing them to watch what they want, when they want and that also means being able to watch those programmes on demand. From US studios to small programme-makers, that is how it is done. The BBC puts UKTV in a very difficult position and we have been unable to come to terms and will replace the channels."

Analysts at Liberum said the row is "likely to bring the matter of retransmission fees back on the agenda" for ITV.

ITV is in negotiations with Virgin over re-transmission fees, with new chief executive Carolyn McCall trying to get Virgin to pay for ITV1 for the first time.

Liberum said McCall has taken a softer line than her predecessor over the issue but the UKTV dispute is "likely to give ITV leverage in its negotiations whatever the outcome - if the dispute gets resolved quickly, the likely reason is that Virgin has probably given more away in any deal with implications for the deal that ITV would strike".


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