Broker tips: Auction Technology, Compass Group, THG

JPMorgan Cazenove upgraded Auction Technology on Tuesday to ‘overweight’ from neutral’ as it argued the shares are overly discounting earnings risk into 2025.

It noted the stock has fallen 53% in the past year as macro factors pressured market growth, coupled with internal challenges from rotated volumes and rate card changes impacting performance.

"While some would argue that visibility still remains low near term, with a lack of company commentary on trading making the bottom hard to call, we see risk reward turning at these level," the bank said.

"We now screen (only) 3% below consensus on FY25 EBITDA (JPMe $86m) and argue that initiatives to drive gross merchandise value are bearing fruit, while levers to build monetization through value-added services can stabilize earnings and grow EBITDA +7% into FY25E."

In addition, JPM said it sees a strong case for rising cash returns to shareholders to stand as a near-term catalyst, and finds the valuation of 7.8x EV/EBITDA 2025E attractive on a growth adjusted basis, "with a high equity cash flow yield in-hand (8%)".

JPM cut its price target on the shares to 530p from 543p.

RBC Capital Markets downgraded Compass Group to ‘sector perform’ from ‘outperform’ as shares are now trading ahead of its unchanged price target of 2,400p.

"We continue to like CPG as a good all-weather stock with structural growth characteristics and a demonstrably defensive earnings profile," it said. "However, as shares are now trading ahead of both our unchanged PT and their 10-year adjusted price-to-earnings average, we see a slower burn from here and lower our rating."

RBC said that having risen 15% year-to-date, well ahead of the local FTSE 100 index and towards the high end of the Pan-Euro Business Services sector in total shareholder return terms, Compass now trades broadly in line with the price target.

"The calendarised P/E multiple of circa 26x for CY24 and circa 23x for CY25 puts it comfortably ahead of its 10-year 12-month rolling forward average P/E (ex lockdown-blighted 2020/21) of just under 21x," it said.

"We believe our (unchanged) DCF-derived PT of 2,400p gives CPG the benefit of the doubt for class-leading organic growth and margins, plus more generous medium-term and terminal growth assumptions. Pushing the PT higher at this point would, we think, be a contrivance."

RBC said the investment case is well understood and relative performance from here is more a call on the macro situation.

"Despite its huge scale, CPG is a relatively straightforward business to understand, with tried and tested management and performance (‘MAP’) processes driving dependable growth, and consequently a very sizeable investor fan club," it said.

"As the macro backdrop is, in our view, little clearer than it was at the start of the year, further outperformance on a 12-month view is arguably now more dependent on the market’s perception of CPG as something of a safe haven - less compelling, even if proved correct."

Jefferies cut its target price for ecommerce group THG on the back of weaker-than-expected numbers for its Nutrition business, but said it was encouraged by improving momentum within the division going into the second half.

The broker also hailed strong performances from the Beauty and Ingenuity arms in the first half, and expressed optimism surrounding the company's plans to demerge tech platform Ingenuity into a separate entity.

Jefferies cut its target price from 105p to 100p after THG said that full-year EBITDA would be at the lower end of market expectations, but the broker still kept a 'buy' rating on the stock.

The Nutrition division, which owns performance supplements brand Myprotein, saw revenues fall 7.5% and EBITDA drop 58% on the back of yen weakness, whey protein price inflation and falling selling prices.

"There are positives though, with: 1) offline continuing to perform strongly, 2) the rebrand now largely complete, 3) Nutrition set to exit Q3 having returned to growth, and 4) local manufacturing having now commenced in Japan, providing a partial hedge going forwards," Jefferies said.

As for THG's planned demerger of Ingenuity, the broker labelled it a "potentially very interesting development that could leave a listed business consisting of two high quality, strategically relevant, cash-generative assets in Beauty and Nutrition".

Jefferies added: "Clearly the relative capital structures would be an important consideration, but we see this as potentially unlocking considerable value for investors in the standalone ecommerce operations."