Broker tips: Royal Mail, Berkeley Group, Plus 500

By Iain Gilbert

Date: Wednesday 19 Feb 2020

Broker tips: Royal Mail, Berkeley Group, Plus 500

(Sharecast News) - Royal Mail was under pressure on Wednesday as Liberum reiterated its 'sell' rating on the stock and slashed the price target to 120p from 175p, arguing that the company's strategy is undeliverable.
The broker said the fact that management openly questioned the achievability of its 2024 targets just nine months after its strategy launch is "hardly encouraging".

It pointed out that margins continue to be squeezed by declining revenues from the letters segment and poor productivity.

"Staff and union co-operation is needed to deliver the recovery, but industrial action seems more likely," it said. Liberum added that the dividend, which could be funded by additional debt, is potentially unsustainable and inadvisable.

The broker cut its 2021 earnings per share estimate by 56% and its 2022 estimate by 83%, to reflect high operational gearing and low margins.

In an update earlier this month, Royal Mail said recent trading was in line with expectations but warned that industrial unrest threatened its turnaround.

The company said its outlook for next year was "challenging" and that the threat of strikes by its workers put its transformation plans at risk. It said letter volumes would fall faster than expected next year and that the UK parcels and letters business was more likely to be loss-making.

Berkeley Group was the standout gainer on the FTSE 100 on Wednesday as HSBC upped its rating on the stock to 'buy' and said it now has 'buy' ratings on all nine listed housebuilders under coverage.

The decisive general election result has brought the prospect of a final settlement of Brexit closer and unleashed pent-up demand in housing activity that we are forecasting to induce a full year 2020 3% rise in UK-wide new home sales reservations," it said.

HSBC said it expects the restriction in the government's help to buy equity loan system to first-time buyers from March 2021 to contribute to this rise in the sales rate.

The bank upgraded Berkeley from 'hold' and hiked the price target to 6,620p from 4,540p, saying it's set to deliver the second-highest return on invested capital in the sector. HSBC noted the shares are up 56% since 2019 lows, in-line with sector's 54% rise.

"The current share price, in our view, is not fully pricing-in the improvement in near-term London housing market as well as the wider South East housing market and long-term prospects," it said.

Analysts at Canaccord Genuity reiterated their 'sell' stance for shares of derivatives trading platform Plus 500 following a large 23% drop in the number of active users in 2019 on the back of the highest ever 'churn' rate observed, at 64%.

On the back of that churn rate, the Canadian broker lowered its revenue estimates for 2020 and 2021 each by 4% and its net profit forecasts by 4% and 7%, respectively.

Earnings per share in 2020 would be spared thanks to the $50m share buyback in place, but the broker did cut their estimate for 2021 by 4%.

The churn rate - the proportion of users that stops subscribing to a service - might still be headed higher and they now expected no active client growth over the medium-term.

"In fact, risk to our new client assumptions is probably to the downside and the churn rate could be higher," analysts Justin Bates and Portia Patel said.

The result of the "much weaker" customer numbers was a 6% miss in 2019 full-year revenues versus their estimates, with profits before tax 2% below their projections alongside.

They also highlighted the risk from the restrictions on leverage that were set to kick into effect Down Under in 2020, which they said would lead to a 15% year-on-year drop in Australian average revenues per user in 2020-22, with risks tilted to the downside and with overall acquisition costs looking set to rise.

Canaccord Genuity also trimmed its target price for Plus 500 shares from 546.0p to 541.0p.


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