Broker tips: Marks & Spencer, Intertek, Landsec

Bank of America Merrill Lynch upgraded Marks & Spencer on Friday to ‘buy’ from ‘neutral’ as it argued the stock is still too cheap and consensus earnings too low.

The bank said that despite the stock’s outperformance year-to-date, it believes that M&S remains mispriced and sees potential for upward earnings revisions.

"Our revised EPS estimates are 5% above consensus over FY24-27E supported by higher margin expectations," it said.

Bank of America said its new price target of 300p, up from 197p, is driven by its increased earnings estimates and a 70 basis points lower WACC (weighted average cost of capital) assumption.

BofA ML said M&S is delivering on its turnaround and closing its performance gap to peers. Yet, it continues to screen as one of the cheapest stocks amongst peers across several valuation metrics based on its estimates - 10x FY25E price-to-earnings (peers 12x), 1.1x EV/ROCE (peers 2.0x), free cash flow yield 10% (peers 8%).

"If we apply peer multiples to M&S Food, current shares imply an 8x FY25E P/E for the C&H (Clothing & Home) business - too low in our opinion considering market share gains and better brand heat."

ML also pointed to the fact that the UK consumer backdrop is showing some signs of improvement, and said this could support consumption and sentiment for consumer discretionary equities.

"Real wage and disposable income growth has inflected, and consumer confidence is recovering. This could be further supported by the recent pivot in UK interest rate expectations. A softening labour market and elevated mortgage rates remain key risks, however," it said.

Citigroup reiterated its positive stance on shares of Intertek, saying that the stock is now trading at historic valuation multiples.

The bank raised its target price for Intertek from 4,973p to 5,055p, and maintained a 'buy' rating.

"We are buyers of Intertek. The stock trades towards the low end of the P/E, EV/EBITDA, and EV/sales ranges seen since the start of 2013," Citi said in a research note.

The product testing, inspection and certification firm reported in July that, on a constant currency basis, first-half revenues rose 8.3% to £1.64bn, while adjusted operating profits rose 13.3% to £245m as adjusted operating margins improved 70 basis points year-on-year to 15%.

"We believe that ITRK has c.240bps of quantifiable margin opportunity, as well as the opportunity to grow constant currency operating profit faster than across the 2014-19 period," Citi said.

Following significant moves in foreign exchange, the bank raised its operating profit forecasts for Intertek for 2024 to 4% above consensus.

Shore Capital upgraded property group Landsec from 'sell' to 'hold', saying that the risk-reward is now more balanced.

The company remains a business "in transition", according to analyst Andrew Saunders, as it shifts from a legacy London office/retail landlord to one with better exposure to mixed-used and urban regeneration and sectors where it has a competitive advantage. However, downside has now been priced in, he said.

Landsec held a capital markets day this week in which it showcased completed new West End developments.

"The event looked at two recent completed developments - n2 in Victoria and Lucent in Piccadilly. Both demonstrated Landsec’s ability to deliver complex projects within existing central London infrastructure and also provide appealing multi-use spaces that can perform for occupiers in a changing work environment," Saunders said.

"We believe investor sentiment should now start to warm to the stocks with office exposure here and, in our mind, Landsec’s event yesterday looks particularly well-timed."

Saunders also reckons that the market mood towards real estate investment trusts in general should begin to improve as the UK interest-rate cycle reaches its peak.

"While there remain wider challenges for the office sector at large, Landsec’s wider portfolio also looks in broadly good shape. This position is increasingly at odds with the current share price - that implies a 30% fall in the portfolio value in FY24F," Saunders said.