Broker tips: Compass, Marston's, Ocado, Hochschild

JP Morgan upgraded its ratings for both catering giant Compass Group and pub and hotel operator Marston's after its latest review of the Europe-listed leisure sector.

The bank lifted both stocks to 'overweight' from 'neutral'.

JP Morgan said it was taking a "slightly more conservative approach" to estimates and valuations across the European leisure sector heading into 2024, and rolling its price targets over by a year to 2025 calendar year.

"In the context of the solid performance of hotels in 2023, we reshuffle our preferences and turn more constructive on catering (better visibility, decent growth) and remain more selective on gaming," the bank said.

Compass's target price was raised from 2,200p to 2,500p, while the Marston's target is now 58p from 54p previously.

Analysts at Goldman Sachs said they don't see much upside for the Ocado share price from here on in, as the bank slashed its target price for the stock from 900p to 700p and maintained a 'neutral' rating.

The bank said it was now including Ocado's first non-food automated distribution deal announced last month with McKesson Canada in its forecasts.

While the future potential for the non-food distribution market is large - particularly within retail, pharmacy and automotive - the deal currently only covers one site and equates to a value of 1.5p per share.

For the core grocery operations, Goldman has cut its forecast for the number of customer fulfilment centres (CFCs).

"Given the increasing prevalence of quick delivery, click & collect, and third-party platforms, we expect Ocado to on average fulfil 16% of partner sales, leading to an eventual CFC count of 150 by 2040, from 203 previously," the bank said.

"Previously, we assumed that Ocado CFCs would fulfil effectively all online partner sales; however, we are now of the view that not all segments of online grocery are likely to be fulfilled by Ocado CFCs."

Goldman explained that in large markets like the US, orders are split 50/50 across delivery/click and collect, and Ocado is primarily used for delivery. Meanwhile, same-day deliveries represent a big proportion of the market, of which the majority are low basket sizes fulfilled by bikes.

"Whilst Ocado has developed the Zoom quick delivery proposition, and we estimate roughly a third of Ocado.com sales are delivered same-day, we expect significant competition from 3rd party platforms such as Instacart, Deliveroo, and Uber Eats, and we do not assume Ocado will retain a 100% share of this channel amongst its partners’ orders," the bank said.

If Ocado did maintain 100% share of this channel among partners' orders, the price target for the stock would be 1,066p.

Analysts at Canaccord Genuity initiated coverage on silver and gold miner Hochschild Mining at 'buy' with a 145.0p target price, saying its Mara Rosa project was a "potential catalyst for turnaround".

Hochschild Mining operates three gold mines in Peru and Argentina and is currently in the process of constructing its fourth mine in Brazil, which Canaccord Genuity believes could be at "a profitability inflection point" for the first time in three years.

Canaccord thinks 2023 will mark an adjusted underlying earnings low of roughly $200m, driven by weak production at its Inmaculada and Pallancata mines but also higher costs across all operations. However, the analysts also noted we were "almost at the point" where 2023 was in the rearview mirror.

"Production guidance for 2024 given at the recent capital markets day was much stronger than we anticipated at Mara Rosa - we think reflecting management confidence in the ramp-up ahead. We forecast 70k oz of production in 2024, below guidance of 83-93k oz. Overall, this leaves our 2024 attributable production forecast at 331k oz vs guidance at 343-360k oz," said Canaccord.

"We forecast operating costs to remain high in 2024, as well as capex. For this reason, we forecast peak net debt in mid-2024, followed by a significant deleveraging to occur from 2H24 all the way into 2026. We also use a conservative gold price forecast of sub-US$2000/oz until 3Q25, which we think provides some potential upside to our forecasts should gold prices hold."

The Canadian bank also reckons that the first gold pour and commercial production at Mara Rosa should provide two strong near-term potential catalysts for Hochschild in the first and second quarters of 2024, respectively.