| Broker tips: William Hill, DFS, Mothercare Nomura has maintained its 'buy' rating on William Hill after the bookmaker issued a profit warning due to newly introduced regulatory measures and poor sporting results. Hills revealed operating profit for 2016 will be in the range of £260-280m, which was 9-16% below the Bloomberg consensus estimate of £308m. After the analyst call, Nomura explained that of the £36m lower EBIT guidance, all related to its online division, with £20m-25m reflects full-year projections of reflects full-year projections of newly introduced regulatory measures and the balance poor sporting results, most of which was from the recent Cheltenham festival. "The impact from the regulatory changes, introduced on 31 October 2015 is of concern to us," Nomura added. Regulatory changes introduced in October to help problem gamblers self-exclude or time-out from their betting accounts has negatively affected EBIT by £2m in the year to date, Nomura noted, meaning around 3,000 accounts per week were affected, 50% more than the company indicated the start of the year. With the cumulative effect, according to the company’s models, being £20m-25m the investment bank said the margin for error on the current guidance remained "high" and "likely to be compounded when further regulatory measures are introduced on 30 April regarding limits on auto-play". "We expect these regulatory changes to have broader industry-wide implications, with greater impact on those companies exposed to online and specifically gaming sportsbook." On the conference call, Nomura said the interim MD of the online division "devoted much time to the new strategy of value over volume, claiming that the lifetime value of customers was more important than customer acquisitions", while many recently acquired customers had been unprofitable, ‘abusing’ bonuses and sign-up promotions. Prior to downgrades (and today’s share price correction), the stock had been trading at 12.6 times 2016 earnings. Despite hanging onto its recommendations, analysts admitted they thought uncertainty regarding the online division from regulatory measures and the management and strategy changes "may mean that the shares will struggle to reach their full potential in the near term". DFS Furniture’s shares declined on Wednesday as Numis cut its full year 2016 pre-tax profit forecast by £1m to £62.5m after the company warned of an uncertain outlook. The group reported underlying earnings before interest, tax, depreciation and amortisation rose to £31m in the first half from £27.6m in the same period the year before as group sales increased 7% to £461.3m. The growth was driven by 6.2% growth in like-for-like sales and increased contributions from its Sofa Workshop and Dwell brands. Free cash flow was up 7.1% to £37.7m and the furniture retailer lifted its interim dividend by 12.9% to 3.5p. However the company warned it was “not clear what the impact and outcome will be on consumer confidence and sterling” ahead of Britain’s referendum on its European Union membership on 23 June. Numis said given the uncertain outlook and full impact net international losses (£2-3m), it reduced its full year pre-tax profit. Yet the analyst said with “solid strategic progress being made and the potential for cash returns getting closer, we retain our positive stance”. Numis reiterated an ‘add’ rating and target price of 340p. Peel Hunt upgraded its rating on Mothercare to 'buy' from 'hold' and set a target price of 275p that offers more than 45% upside to the shares' last close. The broker acknowledged the irony of Mothercare’s UK business crawling back on track to return to profitability next year, coinciding with international progress tottering, mainly due to currency headwinds. Mothercare's UK stores are now producing positive like-for-like sales for the first time since 2008 and the online, customer-centric approach puts the business well ahead of quoted peers in mindset and execution, Peel Hunt said. As a result it has upgraded its UK assumptions for the UK to be back in profit next year, with the store refurbishment programme in full swing, delivering double-digit sales uplifts for "little disruption" and converting roughly 30% of the estate each year over the next three years. The improved insight on customers, in an attempt to reach the highly granular level of pure-play e-retailers, has impressed the broker. "Store-based retailers generally lack the customer-centric mindset, let alone the systems and capabilities to run the business that way," analyst John Stevenson observed. "Mothercare is now well into this journey, driving high average transaction values in-store and online, with greater response to customer communications (sales +81% from email campaigns), all driven by a central customer database and increasing levels of personalisation." Looking overseas, where only 2% of sales are transacted online, changes to systems are underway that Stevenson believes will generate a "significant" uplift in revenues and improve customer recruitment. However, the softer international outlook and especially adverse currency movements outweighs the improved UK outlook, leading to cuts to forecasts for profit before tax by circa £3m to £19.2m for 2016, and £2m to £30.4m for 2017. Nevertheless, trading on 14 times forecast earnings of 13.4p, "the shares offer value", the broker said, particularly given the UK transformation and opportunity for online improvement in the international business. | 
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