Broker tips: Burberry, Smith and Nephew, 3i Group

RBC Capital Markets upgraded Burberry on Wednesday to 'outperform' from 'sector perform' and hiked its price target on the stock to 900.0p from 650.0p.

The Canadian bank also added a "speculative risk" qualifier, on the basis that Burberry was potentially an acquisition target for Italy's Moncler or other industry players.

RBC said Burberry's share price has not responded to recent unconfirmed press reports, "which may be helpful as it could provide upside if an approach materialises".

More fundamentally, and irrespective of any potential takeover, RBC said it agrees with Burberry's approach to focus on outerwear, with new chief executive Joshua Schulman expected to present further details on strategy at its interim results on 14 November.

RBC said the valuation remains depressed, with Burberry trading at 1.2x CY25E EV/sales, which is a material discount to the luxury sector on 3.5x and its historical average of 2.2x.

"This makes the proposition more attractive for Moncler, as it is a sector leader in outerwear (€1.9bn revenues, 75% revenue mix), whilst Burberry's outerwear business potentially has room for further growth (£890m, 30% mix)," said the bank. "Burberry's current value is less than half of peak £10bn market capitalisation in FY23 (versus £3.1bn today) making any potential acquisition offer relatively opportunistic in our view."

Analysts at Berenberg downgraded medical equipment manufacturing company Smith & Nephew from 'buy' to 'hold' and lowered its target price on the stock from £14.50 to £10.50, stating the group's path to recovery was now "less clear".

Berenberg said Smith & Nephew released "a disappointing Q3 trading report" last week, which revealed that growth in its US orthopaedics business still lagged peers despite showing signs of improvement and that headwinds in China had led to guidance downgrades for 2024 and 2025.

"Given these challenges, we are uncertain about whether we will see a significant improvement in the company’s financials over the next 12 months," said the German bank. "More than two years into the company's turnaround plan, the slow pace of recovery somewhat calls into question the level of improvement we can expect from management's 12-point plan in the medium term."

Berenberg added that while S&N’s shares were "clearly cheap", they trade broadly in line with the bottom end of its orthopaedics peer group on a 9x 2025 enterprise value/underlying earnings ratio.

"This seems fair, in our view, given the current uncertainties," concluded the analysts.

Deutsche Bank upgraded listed private equity firm 3i Group on Wednesday to 'buy' from 'hold'.

Pointing to 3i’s investment in European discount retail chain Action, Deutsche Bank said there was a "compelling" case for continued strong underlying earnings growth in the long term.

The Germab bank also highlighted Action's positive customer proposition and operating model, proven store rollout capabilities and continued growth in sales per store. DB said it expects cash distributions covering 3i’s carried value within nine years.

Across the rest of 3i’s portfolio, Deutsche Bank said there was potential for return on investments to be "steady" in Infrastructure and Scandlines.