Broker tips: B&M, Tesco, Lancashire

JP Morgan cut its performance rating for UK-listed stocks B&M and Tesco as part of its downgrade of the whole European food retail sector.

"We take a cautious stance on the sector, reflecting our analysis of grocery pricing deflation prospects as we approach 2024," said analyst Borja Olcese.

"We think current sentiment and valuations make for an unattractive risk reward as investors start to reassess portfolios into 2024, when we expect grocers’ profit/loss and cash-flow dynamics to worsen vs 22-23, triggering downside risk to consensus."

Olcese said deflation is a "real possibility" and one that is not fully factored into retailers' forecasts of their share prices.

As such, the bank downgraded stocks in its coverage it thinks are the most exposed, two of which are B&M and Tesco. B&M was hit with a double-downgrade from 'overweight' to 'underweight', while Tesco was cut from 'overweight' to 'neutral'.

Morgan Stanley reassessed its performance ratings on stocks in the insurance sector, leading to a downgrade for Hiscox and an upgrade for Lancashire Holdings.

As part of its review of European insurance, Hiscox was cut from 'overweight' to 'equal weight' (price target reduced from 1,387p to 1,233p) and Lancashire was moved from 'underweight' to 'equal weight' (price target increased from 627p to 692p).

European insurance stocks are trading at 9x earnings - a 24% discount to the broader stock market, compared with the 15-year average discount of 29%.

"Given the cash flow profile (7.5% capital return yield), strong Solvency capital (229% S2 ratio) and rising interest rates benefits, we believe there is further upside for the sector and thus we maintain our Attractive view going into year end."

Nevertheless, on Hiscox, Morgan Stanley said its previous positive rating centred around the company's "diversified growth profile, which provided more stable earnings than peers as well as improved underwriting following corrective actions in Retail and London Market”.

The stock has now outperformed Lloyds of London peers Beazley and Lancashire by 11% and 5% so far this year, respectively. "Following the 1H23 results we move down to 'equal weight' as we see less visibility on improving growth and underwriting from here," the bank said.

In regards to Lancashire, the stock has underperformed European insurance peers by 15%, despite delivering higher top-line growth and better pricing conditions than others. The bank pointed out that shares now trading at just 5.3x forward earnings "which we view as attractive".

Canaccord Genuity initiated coverage of Trainline with a ‘buy’ rating and 371p price target as it argued it’s potentially a 10-15% organic growth business and said the valuation is "very low valuation for such a high-growth and quality platform player".

It said Trainline is a high-growth platform business that it believes investors have largely forgotten about.

"The risks around macro factors, regulation and competition are limited, in our view.

"We believe Trainline is now about to see a re-acceleration in growth to a compound 10-15% per annum., with increasing margins and a potential cash return story developing."

The broker said that trading on a FY24E EV/EBITDA ratio of circa 11x and c.6% free cash flow yield, it expects a re-rating to occur.

"At the current valuation, the UK SaaS and International B2C businesses appear to be included for free," it said.