Broker tips: Diploma, Halfords, Aston Martin

Analysts at JP Morgan Cazenove downgraded life sciences group Diploma from 'overweight' to 'neutral' on Tuesday, citing some "difficult" near-term trading and an "uncertain" medium-term outlook.

JP Morgan said the decision to cut its valuation on Diploma came after the stock outperformed the FTSE 250 by roughly 15% following its upgrade on 27 March.

"We still like the business, but difficult near-term trading, and an uncertain medium-term outlook in some businesses provide limited upside to the 25-30x medium-term price-to-earnings ratio," said the analysts.

The investment bank noted that Diploma's trading had deteriorated sharply in April, with underlying revenue down 28%, but acknowledged that the group's cost-saving actions produced around £3m-worth of offset, such that the drop-through on this revenue reduction was around 25%.

"Even on this revenue reduction, the group remains profitable and cash flow positive, with management suggesting this would also be the case on a 50% revenue reduction," said JPM, which also estimates that on an organic basis, April profit will be down about 40% year-on-year.

JPM, which did up its target price on the group from 1,760p to 1,850p, also stated Diploma's M&A ambitions were "not changed" but warned that travel and other Covid-19 related disruptions could cause "some delay".

Liberum has upgraded its price target for Halfords after the government announced a £2bn investment programme to boost cycling and walking.

The bank, which has ‘buy’ rating on the bicycle and car parts specialist, has increased its target price to 250.0p from 200.0p. As at 1115 BST, shares in Halford were trading 3% higher at 194.77p.

Analyst Adam Tomlinson said plans announced by the government last week – part of the £2bn first stage of £5bn new funding for cycling and buses – “will give the largest ever boost for cyclists and pedestrians, create emergency bike lanes to help support the transport network and bring forward trials of rental e-scooters.”

He continued: “Halfords’ brand strength, leading market shares and product authority position it very well to benefit from the government’s initiatives to encourage more cycling across the UK.

“Cycling was a key driver behind the group’s very resilient recent trading update, and this boost could continue to for some time. While there will have been pull-forward of demand from customers that were already planning a purchase, the latest guidelines – and the public’s likely desire – to avoid public transport will have created new demand, and may well continue to do so.

“Against the current backdrop, the relaunch of the group’s much-improved integrated website in February now seems particularly timely.”

Aston Martin Lagonda slid as Peel Hunt downgraded its rating on shares of the luxury carmaker to ‘reduce’ from ‘hold’ ahead of its first-quarter results on Wednesday.

The broker said it has updated its forecasts to reflect the recent rights issue and placing and also had a "first stab" at the potential impact of Covid-19 on performance this year.

"Although core sports car volumes are expected to be materially lower this year, we anticipate production to ramp on the DBX through the second half, with the St Athan plant reopened last week," Peel said. "However, despite the new model, we expect group sales to decline this year and the group to book a significant operating loss."

Peel said it has assumed that sports car volumes virtually halve this year to 3,100, similar to where they troughed in 2009. It has also trimmed its 2020 sales volumes for the DBX to 1,600 vehicles to allow for some slack in the "ambitious" production ramp through the second half and lowered its DBX growth trajectory into 2021/22.

"As a result, we now expect sales to decline to £880m this year and the group to report an operating loss of £125m," it said.

The broker’s model assumes operating breakeven next year but a £90m pre-tax loss.

"We expect the operating losses, interest cost and £285m capex this year to largely absorb the proceeds of the recent placing and rights issue. Consequently, ongoing balance sheet concerns will continue to weigh on the share price."