Broker tips: Dunelm, Persimmon, RWS Holdings

Deutsche Bank initiated coverage of homeware retailer Dunelm on Friday with a ‘buy’ rating and 1,313p price target, arguing that the recent de-rating is a buying opportunity.

The bank said that since its IPO in 2006, Dunelm has delivered an impressive annualised equivalent return of 18%.

It said the valuation de-rating since February offers a buying opportunity for a business with consistent delivery and compounding earnings growth.

"Dunelm is currently trading at a small discount to its five-year pre-pandemic PE average of 15.3x despite warranting a premium in our view, given greater scale, category expansion and online investment," DB said.

"Our comprehensive analysis supports: 1) Further market share gains driving sales growth despite a weak market; 2) Furniture expansion providing a significant sales tailwind; and 3) Robust cash conversion allowing ongoing cash returns to shareholders."

As a result, Deutsche forecasts around 5.5% sales and 7% earnings per share compound annual growth rate for FY23-27.

Analysts at Berenberg lowered their target price on housebuilder Persimmon from 1,600.0p to 1,400.0p following the group's first-quarter trading update a day earlier.

Fundamentally, Berenberg still forecasts "a challenging market outlook", so it does not consider Persimmon's valuation to be "attractive enough" to turn more positive given current macro uncertainties.

Berenberg noted that trading continues to exhibit a recovery from the trough of Q4 2022, but said this still leaves customer demand "materially below" where it was a year ago.

The German bank also pointed out that Persimmon stated pricing has "remained firm" and that private average selling prices were 10% higher than a year earlier. However, while Berenberg believes this increase relates to favourable mix impact rather than underlying house price inflation, it said such resilience in pricing was nevertheless reassuring.

Meanwhile, cost inflation remains a material headwind at 8-9% with Persimmon adding that it sees "limited signs of easing in the short term".

"We maintain the cautious view we have held on the stock and housebuilding sector since we took coverage in mid-2022 ... on account, primarily, of the twin concerns of a significant deterioration in customer affordability and margin pressures," said Berenberg, which stood by its 'hold' rating on the stock.

"Moreover, in the face of such pressures, we have seen sector valuations - including Persimmon - as not attractive enough. Persimmon trades on 12x EPS, 1.1x TNAV with a 5% dividend yield."

Analysts at Canaccord Genuity lowered their target price on technology firm RWS Holdings from 330.0p to 265.0p, stating the current macro environment was starting to "bite".

Canaccord Genuity said RWS' recent interim trading update had "negatively surprised to the downside", with a roughly 7% organic sales decline flagged, a significant acceleration from the 3% drop in the prior half.

The Canadian bank noted that RWS had cited a number of reasons for this, including rising pricing pressure and lower volumes among its big tech customers in language services, as well as the impact of customer losses and approval delays in regulated industries, "muted growth" in software/technology, and "continued depressed spending" in IP services.

Canaccord noted that RWS did not formally reiterate its 4% organic growth guidance for this year, but given the weak first-half performance, it now views it as being "out of reach".

"On our lowered estimates FY23 EPS is expected to decline by 12% yoy, staying broadly flat thereafter implying 6-19% downside to consensus EPS expectations. We set our new target price at 265p, based on a c.11x cal. 2024E P/E multiple, broadly in line with UK tech-enabled services peers," said Canaccord, which maintained its 'hold' rating on the stock.