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Broker tips: Royal Mail, Mitchells & Butlers

24 May, 2019 15:04

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(Sharecast News) - Goldman Sachs upgraded Royal Mail to 'buy' on Friday but cut its target price on the group from 360p to 320p due to higher near-term costs.

The New York-based investment bank believes Royal Mail's current share price discounts no improvement in its profitability as, even after its dividend cut, the stock is yielding 7% despite "clear areas of efficiency potential".

GS noted that Royal Mail's capital markets day on Wednesday seemingly signalled a "clear shift of focus" towards the fastest growing part of the business - parcels, where it has begun pursuing disciplined price increases to improve profitability.

Discussing the company's recent switch in focus, GS said: "Royal Mail aims to become a parcels company that also delivers mail, from being a mail company that also delivers parcels."

"With the stock trading on just 9x FY20E P/E, we believe that the risk/reward is significantly skewed to the upside (on our estimates, the stock is trading on just 6x FY22E P/E) and upgrade the stock to 'buy' with a 320p 12-month price target."

The analysts stated that although Royal Mail's profitability had been shrinking in recent years, partly due to weaker-than-expected volume performance in mail, UK top-line "should" return to growth allowing for margin expansion.

GS also highlighted the fact that Royal Mail had increased prices from January 2019, something it believes should "contribute positively" to its top line for the coming quarter.

Shares in pub chain Mitchells & Butlers fizzed higher on Friday as Liberum upgraded the stock to 'buy' from 'hold' and hiked the price target to 340p from 270p after its half-year results a day earlier.

On Thursday, M&B said like-for-like sales grew 4.1% in the first half, while total revenue rose to £1.19bn from £1.13bn in H1 2018 and pre-tax profit pushed up to £75m from £69m.

The broker said M&B has reached a "tipping point", with sustained like-for-like outperformance now translating to profit growth.

"Importantly, its approach is multifaceted, driven by a large number of initiatives driving both sales up and costs down across all parts of its estate. Tellingly, LFL sales growth has accelerated across both the invested and uninvested estates which implies to us that it is sustainable and reflective of a more ingrained commercial culture.

"This has driven improved returns and cash generation which in turn is reducing leverage and de-risking the overall investment proposition."

Liberum said it was lifting its pre-tax profit/earnings per share forecasts by 4.6% in FY19E and 9.2% in FY20E.

The broker added that the shares are inexpensive, trading on CY19E EV/EBITDA of 6.6x and price-to-earnings of 7.2x.

"While we still do not expect reinstatement of a dividend soon, we do expect £80-£100m annual debt to equity value transfer to help drive the share price."

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