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What’s happening

Smith & Nephew slipped after the FT revealed that the medical devices maker had held talks to buy US-based spine specialist NuVasive in a deal potentially worth more than $3bn.

Analysts questioned whether S&N’s new chief executive Namal Nawana was right to consider buying a spine procedures company, given the niche has shown slow growth for a decade because of pricing pressure from US insurers and is dominated by Medtronic and Johnson & Johnson. “We think there are better potential acquisition targets in end markets adjacent to S&N with faster growth that would better leverage [its] existing businesses,” said Cantor Fitzgerald.

Just Eat was in demand after 2.2 per cent shareholder Cat Rock Capital called on the takeaway delivery company to merge with a peer. In an open letter, Cat Rock — which also has a stake in €3bn-valued Danish delivery group — said Just Eat’s board had shown it cannot find a suitable CEO.

“It is clear that Cat Rock, without naming names, is hinting at Takeaway to be the ‘well-run industry peer’ to merge with Just Eat. Cat Rock clearly holds Takeaway CEO Jitse Groen in high regard and they happen to own circa 2.5m shares worth €143m in the company, while their circa 13m shares in Just Eat are worth £91m.”


Sellside stories

● Canaccord Genuity upgraded Tesla to “buy” from “hold” with a $450 target price. Its upgrade was part of wider industry research on the future of electric vehicles, with the broker arguing that investors were underestimating the multi-decade trend.

“While the nuances of autonomous vehicles, ride-share, and fractional ownership models are yet to fully play out, we believe they are the clear future in transportation and will be powered via an electrification process. As such, we are focused on the broader trend and how to best capitalise on the penetration wave that has only just begun.”


“We view Tesla’s coveted autopilot technology as having an almost insurmountable lead in autonomous driving, which will eventually be the key component of future transportation,” said Canaccord. A valuation of 30 times 2020 earnings “appears to still be relatively conservative given the strong growth in earnings that we expect during the next several years”.

With a view to the shorter term, Canaccord saw Tesla’s recent guidance as addressing concerns around the production volumes and profitability of its Model 3 sedan. With shipments looking strong to the EU and China, the “tiny” first-quarter profit Tesla announced last month should mark the low point of the year, it said.

Canaccord added that Tesla’s appointment of Kathleen Wilson-Thompson and Larry Ellison to the board had allayed concerns around corporate governance. It added: “we believe Elon Musk is demonstrating a calmer demeanour characteristic of strong leaders.”

And with operating cash flow generation of $1.23bn plus cash on the balance sheet of $3.7bn, liquidity worries around Tesla’s need to meet maturing convertible debt obligations “are no longer valid concerns in our view”, the broker said.

● HSBC downgraded TalkTalk to “reduce” from “hold” with an 82p price target. On the back of the internet provider’s fiscal third-quarter update this month, HSBC said that TalkTalk was consistently sacrificing profitability for subscriber growth.

“The balance between customer growth and delivery of profitability that is being chosen is presently skewed too far in favour of subscriber growth. For two years in a row, the company has upgraded subscriber growth targets and downgraded profitability guidance within the third-quarter trading statement, showing an apparent disregard for the importance of the financial guidance which is being issued.”


HSBC said that TalkTalk’s fibre business had been growing via new customers rather than upselling existing subscribers, even though fibre penetration was just 37 per cent of the customer base. “At best, this strategy adds cost, but more concerningly it raises the possibility that the company is not doing enough, or does not have the tools, to convince its subscribers of the benefits of higher speed services,” it added.

A price of 82p a share would be where a takeover of TalkTalk by a peer might make sense, HSBC said. The company would be trading at a 30 per cent discount to the value of its customer base, assuming each new subscriber cost £250 to attract, it estimated.

● Liberum downgraded Barratt Developments and Bovis Homes to “hold” from “buy” in a review of the UK housebuilders. A 20 per cent bounce from December lows had made the risk-reward less attractive, said Liberum, adding: “We estimated that the worst case of a hard Brexit had been discounted in December, but we no longer think this is the case.”

Trading remained resilient in January and valuations across the sector still looked undemanding, averaging just eight times earnings and 8 per cent dividend yields, said Liberum. However, it also noted a shift in buyer sentiment, with about half of builders saying buyer confidence was a big constraint on sales.

● Morgan Stanley upgraded Lloyds Banking Group to “overweight” and downgraded Royal Bank of Scotland to “equal-weight” with price targets of 78p and 300p, respectively.

UK mortgage prices deteriorated further in the fourth quarter, having been weakening for almost two years, said Morgan Stanley. “With pricing under pressure and economy slowing, banks with the highest growth are at risk of missing consensus net interest income expectations,” it added.

The mortgage pricing pressure should be manageable for Lloyds thanks to its deeper loan book and market share of greater than 20 per cent, Morgan Stanley said, adding: “At a time when profitable business models are scarce in Europe, we believe the stock is too cheap to ignore despite macro risks, which we have factored in by doubling [bad debt] provisions.”

RBS was more vulnerable to disappointment because of its mortgage refinancing risk, higher loan growth expectations and higher interest rate sensitivity, Morgan Stanley said.

● Merrill Lynch downgraded Playtech, the gambling software maker, to “underperform” with a 380p price target. The broker said it was not convinced that Playtech’s Asian market had stabilised since the company’s profit warning in summer 2018, given the competitive and regulatory risks of operating in the Chinese market.

“We see the lack of visibility in Playtech’s business as a major impediment to a meaningful share price recovery and we think consensus for 2019 is too high. The dynamic in Asia is a key driver of this, but also some questions remain on the impact of the Italian advertising ban. We expect a deal with GVC regarding Ladbrokes Coral in the coming months, which may be a relief, given it avoids the ‘cliff’ of losing a major customer in 2021.”

Merrill Lynch

● In brief: Accor rated new “buy” at Merrill Lynch; Autogrill rated new “buy” at Merrill Lynch; Bank of Ireland raised to “overweight” at Barclays; Carnival rated new “neutral” at Merrill Lynch; Compass rated new “buy” at Merrill Lynch; Edenred rated new “neutral” at Merrill Lynch; Elior rated new “buy” at Merrill Lynch; InterContinental Hotels rated new “buy” at Merrill Lynch; Mapfre cut to “neutral” at Merrill Lynch; Melia rated new “underperform” at Merrill Lynch; Merlin rated new “buy” at Merrill Lynch; Metro Bank upgraded to “hold” at Berenberg; Norwegian Air cut to “reduce” at HSBC; Petrofac downgraded to “neutral” at JPMorgan; RPC downgraded to “hold” at Peel Hunt; Rotork upgraded to “buy” at Peel Hunt; SSP rated new “neutral” at Merrill Lynch; Securitas cut to “underperform” at Jefferies; Senior upgraded to “add” at Peel Hunt; Sodexo rated new “neutral” at Merrill Lynch; Tui rated new “buy” at Merrill Lynch; Ultra Electronics rated new “add” at Peel Hunt; Whitbread rated new “neutral” at Merrill Lynch.

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