Broker tips: Asos, BP, Segro, Great Portland Estates

Analysts at Berenberg reiterated their 'buy' rating on retailer Asos on Wednesday but lowered their target price on the stock from 760.0p to 600.0p even as it said the group was "all geared for growth".

Berenberg noted that Asos will embark on the next phase of its strategic reset in the 2024 trading year, having successfully implemented its "Driving Change agenda" and delivering £300.0m in profit improvement and cost savings. The new strategic platform aims for a return to top-line growth in the final quarter of 2024, with a more efficient and focused cost base, a more cash-generative business model, and a strengthened balance sheet.

In Berenberg's view, the stock's current valuation underappreciates the progress made by "Driving Change", or the benefit to the business that will be delivered from the next phase of the company's strategic ambition.

The German bank noted that Asos will target a return to top-line growth in 2025, following increased investment in marketing, and said that as well as generating top-line improvement, management also expects margins to expand, given the measures introduced in 2023, and now targets 2025 EBITDA margins to be in line with pre-pandemic levels of roughly 6%.

"We expect the next phase of Asos's strategic implementation to continue the positive momentum generated by Driving Change. We anticipate the return to growth under the newly outlined strategy to be coupled with a more efficient and effective business model that is insufficiently reflected in the current valuation," said Berenberg.

JPMorgan Cazenove downgraded BP on Wednesday to 'underweight' from 'neutral' and cut its price target on the stock to 550.0p from 615.0p, citing the company's "substantial" miss on third-quarter results following a soft second quarter.

"This year is revealing BP’s cashflows as increasingly leveraged to wider standard deviation variables - notably trading and working cap," it said.

JPM said the second order has emerged as a weakening risk/reward on future cash return (60% surplus cash), particularly as volatility moderates across parts of the energy complex.

The bank said it was downgrading its rating on BP in the context of a bullish sector stance that prioritises premium beta to an oil supercycle. JPM retained its preference for overweight-rated Shell, TTE and Eni.

JPM cut its FY23 net income estimate for BP by 10% to $14.6bn on the back of the Q3 miss and mixed Q4 guidance. The estimate for FY24 net income was cut by 6% on moderated upstream and "healthy but normalised" gas trading, JPM, said meaning that its FY23/24 estimates are 9% and 3% below consensus expectations, respectively. Factoring that and signs of a widened standard deviation to BP’s principal cash levers, JPM applied a new 10% fair value discount to the stock.

Shares in Segro were hit on Wednesday after Goldman Sachs downgraded its rating on the UK real estate investment trust from 'neutral' to 'sell', citing "balance sheet constraints".

Segro has delivered average adjusted earnings-per-share growth of around 7% through its last net investment cycle between 2014 and 2022, but Goldman sees this as unsustainable going forward.

The bank said this growth will "slow meaningfully" in the near term as the company reduces investment activity to lower the net debt-to-EBITDA ratio to around 9x, down from a peak of 12.2x at the half-year stage in 2023. Rising finance costs will also hamper growth, it said.

For 2022 to 2025, Goldman expects compound annual growth of just 2.7% in adjusted EPS "due to a balance sheet that is now stretched on net debt-to-EBITDA metrics".

"With an implied yield of 5.2%, there are less levered, less-expensive growth stocks among a global peer set and Segro’s shares have outperformed our UK and European coverage c.7% year-to-date," Goldman said. "On a lowered [return on capital employed] and slightly higher [weighted average cost of capital], we reduce our target price 13% to 580p, which implies 16% downside, and we therefore downgrade the shares from 'neutral' to 'sell'."

Citi downgraded Great Portland Estates to 'sell' from 'neutral' on Wednesday as it argued that stock weakness will deepen before long-term value arises.

The bank said it estimates that office values will fall further and that the stock could overshoot to the downside as negative values materialise, "and potentially discount opportunistic equity".

Longer term, Citi said it continues to expect a once-in-a-cycle buying opportunity for office assets and anticipates GPE taking advantage of its de-leveraged balance sheet positioning and operational platform and cyclical expertise into the end of the cycle.

"We raise the possibility that the scale of opportunity may lead to new equity providing a strong path to both returns and risk management," it said.

"Given that downside risks would appear a nearer term risk and a prerequisite for opportunistic acquisitions and outsized returns to be harvested in the next cycle, we estimate near-term stock weakness as the final phase of downside risks playing out this cycle."