Broker tips: Schroders, Babcock, Capita

Morgan Stanley lifted Schroders to ‘overweight’ from ‘equalweight’ on Thursday as it took a look at European asset managers.

Morgan Stanley said that after underperformance versus the sector year-to-date, with the valuation sitting at a more than 20% discount to its longer-term price-to-earnings average, it sees an interesting entry point at Schroders.

The bank, which lifted its price target on Schroders to 500.0p from 415.0p, said the business is relatively better positioned than peers to tap growth opportunities in private markets given the breadth of its offering, while its Asian footprint positions Schroders well to take advantage of improved opportunities in Japan and benefit from any recovery in China.

"The wealth division provides stickier assets and more stable growth versus asset management," it said. "Given an improving growth trajectory we increase our target P/E multiple to 12x 2025, broadly in line with the longer term European sector average, and still a circa 15% discount to Schroders' longer term average P/E."

Berenberg downgraded Babcock on Thursday to ‘hold’ from ‘buy’, pointing to the fact the shares have re-rated since it initiated coverage in 2022 and now adequately price in the benefits of the company’s strategic turnaround.

"The shares have re-rated by 65% during this time, reflecting the much stronger balance sheet and more focused portfolio," it said.

It noted that Babcock has disclosed a further £90m charge on the Type 31 frigate programme, following the £100m charge disclosed in FY23. The charge stems from higher-than-expected labour costs and the maturing of the design of the vessels, it explained.

"The programme is the last remaining large onerous contract within the group," Berenberg said. "It represents only circa 5-6% of revenue, although it is an increasing cash drag and concerns that there will further charges on the programme may weigh on sentiment in the medium term, in our view.

The German bank, which hiked its target price on the stock from 510.0p to 565.0p, said it would turn more positive on the shares again on evidence that the Type 31 frigate contract has been de-risked and signs that the pension deficit overhang has been further reduced.

RBC Capital Markets lifted its price target on Capita on Thursday to 2,200p from 1,800p as it adjusted forecasts for the Capita One disposal.

Capita announced last week that it was selling its public sector software business for £200m to Orchard Information Systems, a subsidiary of MRI Software.

Capita One provides local authorities, local education authorities and housing associations with revenues and benefits, social housing management and education management software.

RBC, which reiterated its 'sector perform' rating on the stock, said that while the disposal is dilutive for 2025 estimates by around 16%, a good price was achieved and it significantly improves the balance sheet position.

"We rework our sum of the parts, which increases our target price to 22p to reflect the disposal proceeds, along with a recent re-rating of peers, e.g. TEP and SRP," it said. "Whilst our upside scenario points to significant upside, there remain many moving parts - Capita has yet to demonstrate sustainable free cash flow generation, whilst growth is hard to come by and AI concerns are likely to hang over the CX business."