Stocks to watch: Ferguson, easyJet, Restaurant Group, Enel, Sanofi

Tuesday 13:00 BST

What’s happening

● Ferguson edged higher after the builders’ merchant revealed plans to demerge its UK business, Wolseley, and announced that group chief executive John Martin would step down in mid-November. The Americas-focused company, which had been targeted by activist investor Trian Fund Management, also said it was “considering the most appropriate listing structure for the group going forward”.

The UK arm of Ferguson provides about 12 per cent of group revenues and less than 5 per cent of trading profit, said analysts. Shedding the domestic division would move Ferguson’s business closer to higher-rated US peers such as Watsco, Home Depot, Lowes and Fastenal, they said.

“News of the demerger of the UK operations should be taken well given the drag on group growth and profits in recent years (6.3 per cent organic decline in 2018) . . . Ferguson trades on a discount to US peers despite a broadly similar growth and returns profile, which . . . is mainly due to the challenges the UK business has faced. With the potential demerger of the UK business . . . the stock’s valuation gap to US peers could close.”
Goldman Sachs

● Restaurant Group dropped after the Wagamama owner booked a £115.7m impairment charge and onerous lease provisions, most of which stemmed from its leisure division. Andy Hornby, its new chief executive, said the group expected to exit at least 50 per cent of its 352 leisure sites at the first opportunity.

Like-for-like sales growth had slowed to just 0.2 per cent in the past six weeks, from 4 per cent in the first half, as a relapse into declines for the leisure business offset other divisions, Restaurant Group said. In-line interim earnings from the Restaurant Group also showed debt rising to £317m, against £28.1m in adjusted profit before tax, due largely to last year’s Wagamama purchase.

“The liability risk here is something investors should consider carefully. Some of the increase in provision relates to existing sites within the provision group, but there are some new sites that have entered this group. A key question is: is this provision sufficient? With a new CEO, this is potentially a clearing-the-decks exercise, but a sceptic would point out that there have been many previous impairments/provisions. Operating in an oversupplied industry is clearly a major ongoing challenge.”
Barclays

● Just Eat was under pressure after Eminence Capital said it would vote against the food-ordering website’s planned takeover by Takeaway.com, saying the offer was “highly opportunistic” and a “gross undervaluation” of the UK marketplace.

Eminence on Monday disclosed a 4.38 per cent shareholding in Just Eat. The hedge fund also has a 1.56 per cent short position against Takeaway.com according to regulatory filings.

“We think it is increasingly likely the Just Eat bid will not be agreed, just as the agreed private equity bid for Scout24, was similarly rejected by shareholders. We would also agree the bid undervalues the company and it is likely that other bidders will emerge with the soon-to-be-listed Prosus the most likely candidate.”
Liberum

Shareholders of German classifieds publisher Scout24 were right to reject in May a €46 per-share bid from private equity as too low, as the stock has since risen to €52.80, Liberum said. It valued Just Eat at £13.60 a share compared with an implied value on Takeaway’s all-share bid of 770p to 780p.

Amazon and Uber Eats were unlikely to be interested in mounting a counterbid for Just Eat given scrutiny from competition regulators, Liberum said. It chose Prosus, the soon-to-be-listed spin-off from Naspers, as the most likely candidate given it is a co-shareholder in iFood, Just Eat’s Brazilian portal. “Acquiring Just Eat would give Prosus immediate market leadership in 12 of the 13 countries plus the technology of SkipTheDishes, which has had phenomenal success in Canada,” the broker said.

Sellside stories

● Kepler Cheuvreux downgraded easyJet from “hold” to “reduce” with an 820p target.

Brexit uncertainties meant easyJet was likely to publish its 2020 outlook along with full-year results in mid-November, rather than at a trading update at the beginning of October, Kepler said. The broker also cut 2020 capacity growth forecasts from 5 per cent to 3 per cent to reflect industry data suggesting easyJet added just 2.3 per cent of new capacity in its most recent quarter.

Fuel-cost hedging in 2020 was likely to add £180m to easyJet’s expenses, Kepler continued.

“While the company has had a good non-fuel cost performance year-to-date and guides for headline costs per seat excluding fuel to decline this year (helped by 10 per cent capacity growth), we believe it will be more difficult to achieve a non-fuel cost improvement if capacity growth slows.”
Kepler

Kepler forecast easyJet to report a 2020 annual profit before tax of £350m, down 20 per cent year-on-year and well below consensus expectations. Switching from a fleet valuation to the long-term average price-to-earnings ratio, it said: “While we think easyJet could be an acquisition target once the consequences of Brexit and easyJet’s contingency plans have been tested, until then we believe the stock will trade based on the company’s profitability.”

● In brief: Ashmore cut to “neutral” at Merrill Lynch; Daimler raised to “buy” at UBS; Enel cut to “hold” at Berenberg; Grand City Properties cut to “neutral” at Merrill Lynch; Huntsworth rated new “outperform” at RBC; MTG raised to “equal-weight” at Morgan Stanley; Metso raised to “buy” at Kepler Cheuvreux; PVA Tepla rated new “buy” at Deutsche Bank; Sanofi rated new “outperform” at Bernstein; Scatec Solar raised to “buy” at Kepler Cheuvreux; Telefónica raised to “outperform” at Macquarie; Voestalpine rated new “neutral” at Credit Suisse.

Sterling tumbles to 3-year low on rising Brexit fears

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