Broker tips: Marks Electrical, Severn Trent, Softcat

Analysts at Berenberg initiated coverage on online retailer Marks Electrical Group at 'buy' on Tuesday, stating the group was now "making its mark".

Berenberg said on Tuesday that with a "substantial market opportunity, clear competitive advantages, and additional "growth levers" to pull, it believes Marks has "a significant growth runway" ahead of it.

"Marks has additional levers to pull that can support its continued rapid growth. Firstly, brand awareness in the UK is still low at just 7%, but we show that the company’s increased marketing investment is bearing fruit, with Google Trends data showing a strong and sustained improvement over the past two years (while peers’ data has deteriorated). Secondly, Marks is still relatively nascent in its expansion outside of its core MDA category. We think it has a potential opportunity to expand into new product categories over the next few years, with peer disclosures suggesting that an attractive cross-selling opportunity is available. Thirdly, Marks is increasing the number of credit options available on its platform, which can support conversion rates," said Berenberg.

The German bank, which issued the stock with a 120.0p target price, added that Marks' streamlined operating model also resulted in a margin, return on invested capital, and cash-generation profile that was "rare" among high-growth e-commerce companies.

"Marks' streamlined and capital-light operating model underpins a high-single-digit adjusted EBITDA margin, a circa 50%-plus ROIC, strong FCFE generation (positive in each of the past four years), and in turn a 20% dividend payout ratio – all rare traits for a high-growth e-commerce company," said Berenberg.

JPMorgan Cazenove downgraded Severn Trent on Tuesday as it took a look at the UK water sector.

It said the sector has performed well since the start of the regulatory period on 1 April 2020, with all three listed companies delivering strong returns and asset growth, while maintaining dividend growth at least in line with inflation.

"However, we are turning cautious on the subsector, given our belief that returns from April 2025 will be lower than the market currently expects," it warmed.

"We believe the companies can all manage cost inflation, given that revenue and asset growth are both indexed to CPIH.

"Yet, in our view, the regulator will challenge the companies to be more efficient while meeting environmental objectives - this may require further reinvestment in the coming years, limiting outperformance."

JPM maintained its preference for overweight-rated United Utilities on a relative basis to Severn Trent, which it downgraded to 'underweight' from 'neutral'.

The bank also said it was putting Severn and Pennon on "negative catalyst watch" into 7 July, when water regulator Ofwat will be publishing a draft methodology for the next regulatory period.

Shore Capital has initiated coverage on Softcat with a 'buy' rating and 1,349.0p target price, pointing out that the IT reseller's share price has risen 454% since its 2015 market debut.

"Recent weakness - down 25% in the year-to-date - bucks that trend, but also presents an opportunity in our view," it said.

"We initiate coverage with a 'buy' stance as we balance current geopolitical and macroeconomic volatility against Softcat's past resilience in the face of Covid-19 lockdowns, the structural growth prospects of its chosen IT infrastructure markets, and its robust competitive positioning built up over many years."

It noted that the reseller, which has over 200 vendor partners including Apple, Cisco, and Microsoft, "always seems to land on its feet" regardless of the macroeconomic environment.

It added: "By maintaining high levels of customers satisfaction and employee engagement, we believe Softcat can go from strength to strength with continued double-digit growth in gross profit per annum underwriting the investor opportunity."