Broker tips: Inmarsat, Essentra, European media

Inmarsat got a boost as Deutsche Bank initiated coverage of the stock at ‘buy’ with a 1,030p price target.

“We acknowledge that the ISAT thesis centres on the concept of inflight communication gaining real traction and at present there are mixed views, but we see scope for ISAT unlocking value given the size of the market.

“We have carried out bottom-up analysis of the market potential for in-flight communication and about 40% of our target relates to the European aviation opportunity. Given ISAT has underperformed the Telco sector by 16% year-to-date, we see current levels as a good entry to gain exposure to strong growth.”

DB noted that Inmarsat has underperformed the telco sector by 16% year-to-date, so at current levels it represents a good entry point to gain exposure to strong growth, with an attractive 6.1% dividend yield.

The bank argued that the big driver for Inmarsat is the in-flight opportunity, both Global Xpress and the European network, although this is also where uncertainty lies.

DB said it was 2% below consensus in terms of group earnings before interest, taxes, depreciation and amortisation in 2017/18, adding that it is comfortable with its position given the in-flight opex ramp-up.

“Consensus has progressively moved down in recent months and we think we are towards the end of the earnings downgrade cycle. Furthermore we think that investors recognise the ‘over-optimism’ from some of our sell side peers.”

Numis downgraded its stance on Essentra to ‘add’ from ‘buy’ and cut the price target to 470p following the company’s profit warning on Monday.

The brokerage said the profit warning – the second this year – indicates the scale of the challenges facing new chief executive officer Paul Forman.

It said the profit downgrade of around £20m for 2016 is split about 75% Packaging and 25% Filters.

Numis cut its 2016 earnings before interest, taxes and amortisation forecast by 14% to £139.3m, which is within management's £137-142m range. It also downgraded 2017 and 2018 EBITA forecasts by 20-25%, reflecting a more cautious view on future revenue and profit progression.

“Whilst we believe there are few near-term catalysts for a re-rating, we maintain our view on the longer-term attraction of Essentra's packaging and distribution businesses, the opportunity for the new CEO to simplify the group, and note the yield support from the maintained dividend,” Numis said.

Credit Suisse updated its ratings and initiated on stocks in the European media sector.

The Swiss bank upgraded RELX from ‘neutral’ to ‘outperform’ and bumped up the price target to 1,600p from 1,370p. It said the company’s high-quality assets with market-leading positions have led to improving organic growth which should be sustained. In addition, it pointed to cyclicality, almost no advertising exposure and a pragmatic approach to capital allocation.

CS initiated coverage of Sky was at 'outperform' with a price target of 980p. Whilst the analysts acknowledged legitimate concerns over competition from incumbents like BT and over the top players who broadcast their media over the internet, they argued that these threats are overdone. CS said its proprietary survey shows the high degree of complementarity between OTT and Sky.

“The group is defensive, we see opportunities outside the UK and in mobile and believe being underweight post the recent underperformance and given weaker sterling is unwise.”

Credit Suisse started WPP at 'outperform' with a 2,000p price target. The bank said it likes the platform agnostic, globally diverse nature of the Global Advertising Agency space and expects low single-digit organic growth with modest margin expansion. However, it highlighted challenges including price pressures from zero-based budgeters, competition from consultants in digital and the industry debate around transparency.

The bank reiterated its 'neutral' stance on Daily Mail and General Trust but lifted the price target to 830p from 750p. With uncertainty around the new chief executive’s strategy, still-challenged end markets and structurally declining print, the analysts reckoned the current valuation looks fair.

CS downgraded UBM from ‘outperform’ to ‘neutral’ but the price target was raised from 725p to 755p. It said the company is the only pure play asset of scale in the attractive events sub-sector but post a re-rating the valuation is broadly fair given below-peer group growth.

The bank initiated Informa at 'neutral' rating with a 700p price target. New management is mid-way through a turnaround focusing on US events and improving performance in its other divisions, however, execution risks mean the valuation fairly reflects its earnings per share growth profile.

Credit Suisse downgraded education publisher Pearson from 'neutral’ to ‘underperform’ and the price target dropped to 740p from 840p. Whilst consensus is around 11% behind company guidance, multiple headwinds, poor visibility and a history of profit warnings leaves the group’s valuation looking too steep.