Broker tips: IHG, DS Smith, Energean

Analysts at Berenberg took a fresh look at British hospitality giant InterContinental Hotels Group on Monday after the company's most recent quarterly performance came in "a little weaker" than expected.

Berenberg updated its numbers for IHG following the publication of an unexpected trading update from the company in advance of its second-quarter results on 8 August.

The German bank said IHG's most recent quarter had been "a touch weaker" than expected - with a revenue per available room down 72%, compared to the roughly 70% it had been expecting and an expected operating loss of $25m for its owned and leased portfolio, suggesting that the group's margin was also softer than it had been expecting.

However, Berenberg expects IHG's run-rate to improve in the second half but also lowered its expectations for the owned and leased portfolio during the recovery process.

"Pulling the changes together, we take down revenues by 11% in 2020 and by 6% in 2021, with fee revenues down by 10% and 7% respectively. With the changes to owned and leased, we think underlying operating income will fall by 20% in 2020 and by 4% in 2021, with EPS down by 35% and 4% respectively," said Berenberg, which reiterated its 'hold' rating on IHG.

"While the changes to our forecasts lower our expectations for this year, there is no meaningful change to our view on recovery so we leave our price target unchanged at 4,000p."

Jefferies cut its rating on DS Smith to 'hold' as the broker said there were no events in sight to prompt a rerating of the shares.

Analyst Cole Hathorn upgraded DS Smith to 'buy' in early April based on expected demand for the company’s cardboard packaging boxes from food and consumer goods sellers.

But Hathorn said DS Smith's first-half results were disappointing, including the scrapping of the interim dividend, prompting him to cut his earnings forecast for 2020-21 by about 10% due to cost and pricing pressures. This pushes back plans for debt reduction that could have put the company in a position to make capital investments or buy smaller rivals, Hathorn said.

Hathorn switched his rating back to 'hold' from 'buy' and cut his price target on DS Smith shares to 310p from 350p. The company’s shares fell 3.2% to 282.25p at 10:52 BST.

“We lack conviction for near catalysts in the stock to rerate in the absence of wider P&P sector pricing upside,” Hathorn wrote in a note to clients.

RBC Capital Markets has downgraded Energean on valuation concerns, cutting its rating from 'outperform' to 'sector perform' and reducing its price target from 1,100p to 700p.

Last year, Energean agreed to buy the oil and gas operations of Italy’s Edison for up to $850m. But at the end of June, the two sides agreed to slash the value of that transaction to just $284m after Edison dropped its Algerian and Norwegian assets from the deal, and to reflect the weaker outlook for energy prices in the wake of the Covid-19 pandemic.

RBC said: "Despite the Edison acquisition, gas in Israel continues to dominate Energean's investment case; the assets account for two-thirds of our gross tangible valuation.

"However, we now see the company's other assets as less valuable. As a result, we have lowered our price target and recommendation. And although the acquisition potentially mitigates risk by diversifying the portfolio, it increases the complexity of the business case."

Thus, the broker reined in its valuation of Energean's Greek assets "materially", based on their performance and current 'strategic review' status.

The bank continued: "We see potential for upside, and an unwinding of the stock's discount to our tangible net asset value, as management integrates the Edison portfolio.

"However, we believe investors and analysts face a steep learning curve. As result, we anticipate that consensus valuations are likely to come down, before solidifying."