LONDON Broker tips: Halfords, Ted Baker, Nationwide Accident

Date: Tuesday 15 Jun 2010

Income investors should take a look at Halfords in the view of FinnCap, which has initiated coverage of the car parts and cycles retailer.

“Following very solid preliminary results from Halfords, we initiate coverage of the company with a buy recommendation that is based on the resilience of the group’s core trading format and its strong cash flows which underpin an attractive dividend yield in a sector context,” said FinnCap analyst David Stoddart.

With the company targeting 15% annual growth in earnings per share (EPS) “over the next three years or so” Stoddart thinks the company will not achieve this without making more acquisitions. That raises the prospect of the management moving outside of its field of retailing expertise, while Stoddart also hints at the high incidence of value destroying acquisitions in British corporate history (“This is not the place to rehearse the last two decades of academic research on acquisition success rates”).

“The company’s message is that the management team has wide experience of different sectors of retailing and will be able to integrate suitable deals,” the broker says, adding that while “the strategy can work for Halfords … there are good reasons not to count on it.”

As a result of this the broker’s target price of 680p is well below its 745p discounted cash flow valuation of the shares.

A strong trading statement from Ted Baker has prompted Panmure Gordon to raise its profit forecasts for the fashion retailer.

The broker has raised its profit before tax forecast for fiscal 2011 by 4% to £23.5m, while it is now forecasting top line growth of 13.2% compared to its previous estimate of an 8.4% improvement.

“The primary area of outperformance is in the retail division where sales growth has outstripped space growth by 10% implying very strong sales densities,” notes Panmure analyst Jean Roche.

US expansion plans are on track, and it is Roche’s understanding that all four new US stores will be up and running by September, giving them plenty of time to iron out any potential problems before the crucial Christmas trading period.

The broker has reiterated its “buy” recommendation and 608p price target.
Nationwide Accident Repair Services said on Tuesday morning that it had made an encouraging start to the new financial year and while both Collins Stewart and Arbuthnot saw nothing in the statement to prompt them to adjust their earnings forecasts, both are of the view that the stock is undervalued.

Nationwide’s house broker, Arbuthnot, concedes that there will be continued margin pressure in Nationwide’s traditional insurance-related business while the retail side will see only moderate growth, but the broker thinks fears about the risks to earnings have been overdone.

“A 2010E P/E [price/earnings ratio based on projected 2010 earnings] of c.9.5x, yield of 6% and cash generation yield of 6.8% implies a market anticipating some risk to earnings. Our analysis of the current trading environment and the potential from the retail offering would suggest that this level of discount is not warranted,” said Arbuthnot analyst Xavier Gunner.

Arbuthnot reckons the shares are a “strong buy”.

Collins Stewart also draws attention to the company’s juicy dividend yield. “In the light of current encouraging trading, the group’s dividend looks assured,” suggests analyst Michael O’Brien. “We estimate year end net cash of £6.8m, equivalent to 15p per share. The group s balance sheet gives significant scope for investment, something which is likely to further strengthen its market position relative to small, capital constrained private competitors,” O’Brien added,

The broker thinks the shares are worth buying. “Setting aside size, the shares trade at a significant discount to both the Support Services and Retail Sectors,” it notes.