Broker tips: Fever-Tree, Admiral, ITV

Investec reiterated its ‘buy’ rating and target price of 740p for Fever-Tree on Monday after the carbonated drinks maker reported a jump in full year profit.

In the year to the end of December, pre-tax profit rose to £16.8m compared with £2.5m the previous year as revenue grew 71% to £59.3m.

Adjusted earnings before interest, taxes, depreciation and amortisation were up 82% to £18.2m and the company declared a final dividend of 2.3p per share, taking the total dividend to 2.08p from 0.30p in 2014.

Chief executive officer Tim Warrill said growth was strong across all four main geographical regions. He added the group has had an encouraging start to 2016 and look forward to the future with confidence.

“A strong year for Fever-Tree, with the leading UK performance cemented by some good off-trade success but also growing on-trade penetration,” said Investec analyst Nicola Mallard.

“Europe and the US also showed strong growth. However, there remain ample opportunities for further penetration gains in all geographies and in both on- and off-trade channels.”

Investec made no change to forecasts for 2016 and 2017 earnings. The analyst said there was a degree of positive momentum from annualising some of last year’s positive events such its launch of mini cans.

“However, the group also secured some good promotional slots in the period which it cannot count on repeating,” Mallard said.

“We think the group can deliver underlying growth of c£10-12m per annum. Growth over and above this will be determined by sizeable wins in the off-trade, although these are less predictable. Hence, we will update forecasts as and when necessary if the group is successful in adding a number of these.”

Insurer Admiral was under the cosh on Monday following downgrades from HSBC and .

Bank of America Merrill Lynch downgraded Admiral to ‘underperform’ from ‘neutral’ as it took a look at the UK non-life insurance sector.

It said Admiral’s valuation has reached levels the bank genuinely struggles to justify, now trading at 18.1x forward earnings.

“We look at Admiral’s valuation in a number of different ways – relative to peers, relative to history, analysing the various different earnings streams – and all of them suggest to us the stock is overvalued,” said BofA Merrill.

The bank highlighted that its decision to downgrade does not reflect a negative view on the quality of the company.

“Indeed, it is consistent with our ratings on other high quality businesses which we think are overvalued, e.g. Hiscox.”

Merrill maintained its ‘buy’ rating on RSA Insurance, saying the level of its conviction in the recommendation is higher after the company’s full year update.

“We see an even better trajectory on underlying earnings than we had expected, a better solvency ratio, and we think the market has yet to reward the company with an upward rerating.”

The bank kept its ‘neutral’ rating on Direct Line Group, saying the stock’s multiple was broadly fair, the cost-cutting story is well advanced and capital returns this year are likely to be lower than previously expected.

Still, it said the yield remains attractive at 7% near term. “Of the UK non-life companies we cover, it would be our preferred pick for defensive yield.”

HSBC downgraded Admiral to ‘hold’ from ‘buy’ following the strong share price performance and amid limited upside.

It pointed out that Admiral shares are up 14% year-to-date and have outperformed the FTSE 100 and DJ Stoxx insurance index by 18% and 29% respectively.

Still, it said the fundamentals of the business remain strong, with an attractive total dividend yield of 7% and a strong capital position.

The bank lifted its price target on Admiral to 1,930p from 1,748p.

ITV shares look cheap compared to those of sector peers, said Morgan Stanley as it predicted a better advertising outlook than recent data had suggested.

Along with its full year results, ITV said it was seeing flat advertising in the first quarter and that April was weak at minus-5%.

Monitoring feedback from the ad industry since the results, Morgan Stanley said media buyers saw ITV spot net advertising revenue (NAR) rising roughly 2% in the first quarter and were surprised at ITV’s negative NAR figure for April.

Media buyers remained confident on 3.5%-4% NAR growth for the year, with some signs of numbers being edged up to over 4% on expectations of a strong May-July and a firm H2.

"Media buyers report that advertisers are considering Brexit in the context of consumer confidence but no impact on the ad market is being felt."

Morgan Stanley analysts themselves forecast just 2.5% NAR growth for ITV in 2016, despite the hunch that ITV management are confident of 3-4% growth as well.

At the results, chief executive Adam Crozier stated that the FTSE 100 broadcaster had good visibility across the year and that it saw no underlying change to ad industry views on likely TV ad growth from the start of the year.

With ITV shares ending last week just above 234p, they are trading for just under 10 times 2016 EBITDA and at a price-earnings ratio of 13 times, with 9% earnings per share growth forecast through to 2018.

Germany's ProSieben delivers 12% EPS growth in the same period but is on a p/e of 18 times, while RTL is pencilled in for 4% EPS growth and is on 15 times.

The analysts reiterated their 'overweight' rating and set a 300p target price.