Broker tips: Ascential, BAE Systems, Centrica
Analysts at Berenberg downgraded business-to-business media firm Ascential from 'buy' to 'hold' on Wednesday and slashed their target price on the stock to 290.0p from 450.0p, stating it was now "cutting losses".
Berenberg said that while Ascential's group top-line momentum was "strong" during the first half, helped by the outperformance of its intelligence and events division, cracks have since emerged in the company's digital commerce segment's bull thesis.
The German bank highlighted that underlying DC pro-forma revenue growth had decelerated from 33% in 2021 to 19% in the first half, while adjusted underlying earnings margins also cratered from 18% to 2% as the company ramps-up investment ahead of an "expected acceleration" in sales in the second half, despite a decelerating market backdrop.
Berenberg now sees DC margins being lower in 2021 and thinks it may take longer to sustainably achieve the firm's mid-term target of 20%.
"Given that DC is the most important driver of market sentiment and is key to improving Ascential's stubbornly low quality of earnings and its underwhelming ROIC profile, this caution leads us to downgrade our rating to 'hold'," said Berenberg.
JPMorgan Cazenove upgraded BAE Systems on Wednesday to 'overweight' from ‘neutral’ and lifted the price target to 965.0p from 870.0p, saying it now expects the company to deliver around 10% earnings per share growth per year through to 2025 - and probably beyond - with "quite low" risk.
JPM said consensus sales estimates look too low. "We expect higher global defence budgets (US, Europe, Asia) as many countries prepare for new geopolitical realities and seek to reverse under-investment in defence since 1990," it said.
JPM also argued that BAE is a much-improved company, noting that in the first half of 2022, margins were solid across all five divisions, with a strong improvement in the divisions that have lagged in recent years.
In addition, the triennial review in H1 22 confirmed that BAE’s UK pension scheme is fully funded and the company does not need to make any top up cash payments for another three years. JPM also said it expects average free cash flow/net income of around 90% for 2023-25E, allowing BAE to maintain its 50% dividend payout ratio and fund ongoing share buybacks of around £500m per year.
The bank noted that BAE still trades at a 15% discount to US peers. Given its structural improvement and potentially better top line growth outlook, JPM thinks this discount can close.
"At our PT of 965.0p, BAE would trade on a 2024E clean price-to-earnings of 15.4x; given its long-term growth prospects and strong financial metrics we do not consider this a demanding multiple," it said.
Citi downgraded British Gas owner Centrica on Wednesday to 'neutral' from 'buy' following a 70%+ absolute share price performance since the beginning of last year.
The bank said that despite a solid set of first-half numbers, strong FY22 earnings outlook and some clarity on the use of its balance sheet, the share price momentum is likely to be overshadowed by politics in the coming months.
"Furthermore, we believe prospect of any potential cash return has been pushed into next year, given the near-term working capital needs and investment requirements, as well as political sensitivities ahead of record winter energy bills," it said.
"We are also concerned about the impact of a weak economy on Centrica's core Services business, which could struggle to deliver a decent operating performance in the next few years."
Nevertheless, Citi said it continues to like the company's strong free cash flow generation, "stellar" balance sheet and scope for cash return post winter. It also said it sees excess weakness in the shares as a re-entry opportunity.