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Broker tips: Sage, Dixons Carphone, NMC Health, UDG Healthcare, Hikma Pharma, Dechra Pharma

Fri, 11th Jan 2019 14:07


(Sharecast News) - UBS downgraded software group Sage to 'sell' from 'neutral' on Friday, cutting the price target to 520p from 590p as it said the risk-reward was unfavourable and strategic questions remain.

The bank noted that shares are up 17% from their fourth-quarter lows, and while many others in the sector have seen a similar recovery, none has seen a double-digit EPS downgrade since 1 October.

"While management uncertainty is now addressed, neither the new CEO nor CFO brings the "cloud-native experience' sought at the time of Stephen Kelly's departure," UBS said, adding that the company's 40m 'one-off' step-up in R&D investments announced with the FY18 results was likely to be more permanent in nature.

It said that competitive pressures remain. "As Sage Accounting slows we think Sage is storing up trouble in terms of future new customer acquisition as the entry-level historically has been the source of many mid-market migrations," it said.

The bank also argued that Sage's 250m R&D budget still pales in comparison with US rival Intuit's $1.2bn spend.

As far as the company's first-quarter update next week is concerned, UBS pointed out that Sage faces "relatively easy" comparatives for recurring revenues, with growth of 7% in the first quarter of 2018 and 5.8% in the second quarter, versus the fourth quarter's run rate of 7.2%.

Dixons Carphone management have outlined what looks a "solid and realistic" strategy, HSBC said but analysts still lowered their target price on the electronics retailer.

Dixons' new management aims to deliver market share gains, implying positive like-for-like growth in broadly flat markets, expand EBIT margins to 3.5% on the back of 200m in cost savings, and generate 1bn of free-cash-flow over the next half a decade.

HSBC felt DC' had presented a "detailed and clear strategy" with realistic targets that could create "substantial value" on a five-year view.

The bank's analysts felt the company could be "highly cash generative" with its EBIT margin at 3.5% and said that taking working capital into account, it believes management should "comfortably exceed" their 1bn free cash flow target.

HSBC, which lowered its price target on the group from 195p to 150p, said the new strategy had clearly been "thoroughly thought through" and noted that it plays on management's core competencies in digital, credit and systems.

"We can take confidence from the robust strategic position new management inherit," said HSBC.

However, the bank said it "cannot think of a successful retail turnaround in the past five years" - something it noted would likely temper initial enthusiasm.

"We can take confidence from the robust strategic position new management inherit. With DC already a market leader, gaining share and with high NPS this seems a case of making a good company great rather than rescuing a failing business."

NMC Health and UDG Healthcare were given a bruising by Jefferies analysts on Friday, as they performed a check to the healthcare sector.

With its premium rating, NMC was acknowledged as their "most anti-consensus" 'underperform' rating, with a price target of cut to 2,300p as the analysts "expect the market to increasingly focus on cash conversion and potential pressures in the base business in Abu Dhabi in the basic segment".

UDG was downgraded to 'hold' from 'buy' and given a 620p target price as analysts expect market concerns around its Ashfield business to persist in 2019.

The analysts believe Mediclinic "offers value", backed by a 3.2bn freehold property portfolio.

"Momentum stories" such as Hikma Pharma were highlighted and Dechra Pharma was suggested "for investors seeking non-cyclical stories".




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