Lukewarm reviews suggest Merlin is losing its magic, says UBS
What’s happening
● Halfords led the FTSE 250 fallers on a profit warning. The retailer blamed a mild winter for holding back auto parts sales and said poor consumer confidence had affected demand for big-ticket items.
Its earnings range for the fiscal year ending March was £58m-£62m, compared with a consensus of about £70m, and management said not to expect a recovery next year. Halfords had previously guided for flat year-on-year profits next year.
Halfords’ implied cut to year-end 2020 profit “poses some very serious fundamental questions”, said Peel Hunt, which repeated “sell” advice.
“Of course, it’s hard to have visibility on consumer behaviour right now, but car maintenance (the really profitable bit) is extremely defensive and should bounce straight back given normal weather . . . There are very few reasons to hold on here: years of overdistribution and under-investment are coming home to roost.”
PEEL HUNT
Sellside stories
● Merrill Lynch upgraded Twitter to “buy” from “neutral” as part of a internet and social media user survey. Improving metrics in the 18-29 demographic suggested more younger users were turning to Twitter, it said.
The broker’s survey found 48 per cent of US consumers used Twitter, up from 44 per cent in mid-2018. It was also encouraged that 9 per cent of respondents expected to use Twitter more next year, up from 6 per cent in the previous survey, and saw evidence that the social media site had more capacity than rivals to increase advertising volumes.
Merrill found 96 per cent of US consumers used Google, 86 per cent used Facebook and 43 per cent used Snapchat. Instagram showed the biggest improvement compared with its previous survey, with penetration increasing to 60 per cent from 53 per cent as users switched from parent brand Facebook.
● Berenberg downgraded Burberry and Prada to “hold” from “buy” in its 2019 luxury goods sector preview. Sector valuations, while in line with historical averages at 20 times forward earnings, were unlikely to expand much given macro uncertainties so investors should become more defensive, the broker said.
Companies were structurally better prepared than in 2012 for a China downturn and the underlying drivers of consumption were healthier, “allowing for long-term sustainable mid-single-digit growth as the sector enters a period of normalisation in demand”, Berenberg said. However, it saw turnround stories falling out of favour as normalised valuations left little room for error. As well as the Burberry and Prada downgrades, the broker moved to “sell” from “hold” on Tod’s.
Berenberg kept “buy” advice on LVMH and Kering, saying: “While dealmaking in the luxury space continues to be opportunistic, we believe that the significant balance-sheet firepower of the two largest conglomerates in our coverage (an estimated €25bn for LVMH and €10bn for Kering) . . . constitutes an upside risk for the investors — either in the form of value-accretive acquisitions or returns to shareholders.”
● UBS downgraded Merlin Entertainments to “sell” from “neutral” based on lukewarm customer reviews for its Midway city attractions. It put a 295p target on the theme park operator.
UBS found that the average satisfaction score across Merlin’s Midway portfolio had fallen year-on-year with meaningful declines for London Eye and Madame Tussauds London and a disappointing start for the newly launched Little Big City, which offers visitors miniature replicas of iconic buildings. It said: “The performance of core London sites is of particular importance given they account for circa 35 per cent of profits but just 5 per cent of sites. As such declining reviews and hence attendance could have a disproportionate effect on Midway profitability.”
The broker also noted that, while Legoland remained a strong brand with clear rollout potential, like-for-like growth slowed in 2018 and feedback on its Windsor site had deteriorated. The low scores across the group “could be the result of poor investment or operational decisions, with cost cutting and a focus on new business development potentially leaving the core profit drivers of Midway under resourced”, UBS added. “If our data is a leading indicator of site performance, it suggests further weakness in 2019.”
● JPMorgan Cazenove downgraded Umicore and Air Liquide to “neutral” and “underweight” respectively as part of a European chemicals sector review. Lanxess and BASF were both raised to “overweight”.
Recent economic data “suggest a difficult 2019 for the sector, on average, with likely further material cuts to consensus”, said JPMorgan. “However, this is now reflected to a large extent in the recent significant sector correction and some stocks have corrected/de-rated from the peak by almost as much or even more than was seen in past major corrections, including during recessions. Strong balance sheets, on average, combined with the recent significant derating, might again stimulate increased M&A activity.”
If end-market demand stabilised, stocks including BASF and Lanxess look attractive but the risks to 2019 earnings were not fully reflected in Umicore’s premium valuation, said JPMorgan. It also downgraded Wacker Chemie and Clariant to “underweight” and restarted coverage of Akzo Nobel with the same rating, all on valuation grounds.
● Jefferies downgraded Ted Baker to “hold” from “buy” following Wednesday’s better than expected trading update from the fashion label.
“Ted’s impressive 12.2 per cent Christmas sales [growth] shows that customers have not been put off by coverage of the conduct issues currently being investigated. It did, however, cost gross margin and, with Brexit still to come, management remains understandably cautious. [With] the stock up circa 35 per cent since we upgraded in December, we believe Ted offers a more balanced risk/reward.”
JEFFERIES
Goldman Sachs also downgraded Ted Baker to “neutral” from “buy” on valuation grounds. Its £21.50 target price equated to 14.8 times 2021 earnings.
● In brief: Aker BP upgraded to “equal-weight” at Barclays; Autoliv raised to “buy” at UBS; Avast rated “neutral” at JPMorgan; BBA Aviation upgraded to “buy” at Jefferies; Continental cut to “neutral” at UBS; Cranswick raised to “buy” at Liberum; Domino’s Pizza raised to “neutral” at UBS; DNO rated “buy” at Kepler Cheuvreux; Eutelsat raised to “overweight” at Morgan Stanley; EnQuest cut to “hold” at Canaccord and cut to “underweight” at Barclays; Faurecia cut to “sell” at UBS; Faroe Petroleum downgraded to “hold” at Canaccord and Cantor; Gecina upgraded to “buy” at Kepler Cheuvreux; Gym Group downgraded to “equal-weight” at Barclays; Hurricane Energy upgraded to “buy” at Canaccord; Icade upgraded to “buy” at Kepler Cheuvreux; InterContinental Hotels raised to “neutral” at UBS; International Petroleum raised to “equal-weight” at Barclays; Kering cut to “neutral” at UBS; Lundin Petroleum rated “buy” at Kepler Cheuvreux; Mitchells & Butlers upgraded to “hold” at Liberum; PGS upgraded to “buy” at Handelsbanken; Plastic Omnium raised to “buy” at UBS; Polymetal cut to “hold” at Renaissance Capital; Safran downgraded to “neutral” at JPMorgan; SSE rated “outperform” at Credit Suisse; Sound Energy rated “neutral” at Macquarie; Swedbank upgraded to “buy” at Deutsche Bank; Swedish Match upgraded to “outperform” at Bernstein; Tullow downgraded to “equal-weight” at Barclays; UBS downgraded to “hold” at Société Générale.
