Broker tips: Ocado, Severn Trent, United Utilities, Pennon, Seeing Machines

Ocado was under the cosh on Monday after Barclays downgraded shares of the online supermarket to ‘underweight’ from ‘equalweight’ and slashed the price target to 430p from 680p, pointing to a "particularly challenging" valuation.

The bank said it has spoken to a number of industry experts and built a differentiated customer fulfilment centre (CFC) contract roll-out model across all of Ocado's Tech Solutions contracts.

"What we do not debate is that Ocado's grocery technology is market-leading and its Re:Imagined program should improve this further," it said.

"However, our main conclusions from our expert conversations and analysis are: (1) Ocado's medium-term guidance is at risk from existing customer CFC/ module roll-out delays, (2) new customer pipeline is limited in grocery space - and Autostore (covered by Tim Lee) is getting more competitive, and (3) non-grocery deals may be signed soon - but we are sceptical about how much this can scale in the near term without a clearer go-to-market strategy.

"At the same time, (4) Ocado's impending debt maturity wall means that its operating trends in the next 12 months will have an amplified effect on valuation, and (5) current Amazon/Autostore trial in the US presents a significant negative tail-risk that is not well understood."

Barclays noted that the shares are at a discount of around 80% to September 2020 highs, while its price target is a discount of around 55% to the recent July 2023-highs.

"So why UW here? Valuation is particularly challenging given the lack of free cash flow support, in our view, and sentiment matters as much as earnings momentum."

Jefferies upgraded Severn Trent, United Utilities and Pennon as it took a look at the UK water sector.

The bank said that all three companies' business plans "present an unprecedented opportunity for multi-year growth".

"This, alongside a potential for reasonable investment returns, outweighs our previous concerns about political/regulatory risk," it said.

Severn Trent was lifted to ‘buy’ from ‘underperform’ and the price target to 2,950p from 2,100p.

"On SVT, our view is that the recent £1bn equity raise has bolstered their balance sheet significantly, making them well-placed to deliver their PR24 business plans which features 6% nominal RCV growth CAGR across the next regulatory period," it said.

"We estimate SVT can maintain its current dividend policy too, and we assume 300bps of regulatory outperformance."

Jefferies said that such outperformance looks achievable when compared to historical outperformance of more than 4%.

Pennon was also boosted to ‘buy’ from ‘underperform’ and the target price to 850p from 700p.

"We believe PNN's 2025-30 business plan offers an attractive 7% per annum nominal growth in regulatory capital value (RCV).

"We see the proposed plan, if accepted by Ofwat, as financeable without the need to raise new equity or a dividend cut. Our key assumption here is that PNN will be able to earn an extra 200bps return above the base regulated allowance, through cost and operational outperformance."

It noted that Pennon is currently trading at 4% discount to FY23/24 RCV and said this was an attractive entry point for the company.

The bank upgraded United Utilities to ‘buy’ from ‘hold’ and upped the price target to 1,200p from 960p.

"We see UU's business plan as offering sector-leading nominal RCV growth, with projected CAGR of 8% across the next regulatory period (FY24/25 to FY29/30)," it said.

Jefferies said it estimates that the company can maintain healthy levels of gearing throughout and maintain their current dividend policy, assuming 250 basis points RoRE (return on retained earnings) outperformance.

"We do not see a need for the company to raise equity funding even though it is a scenario that is presented in their business plan," it added.

Canaccord Genuity trimmed its target price for Jubilee Metals Group by 8% after the metals recovery company disappointed the market last week with its full-year results.

But the broker maintained a 'buy' rating, saying that it still sees upside to the stock even at the bottom end of its forecasts.

Jubilee, which retreats mining waste materials in key markets of South Africa and Zambia, said on 11 October that revenues for the year to 30 June were up 1% at £142m, while operating profits fell by around a third to £24.8m, as a result of a 22% reduction in the average platinum group metals (PGM) basket price to $1,262 an ounce.

Nevertheless, Canaccord said the results were "in line to slightly better" than expectations and a "good result", especially considering the tough PGM pricing environment.

"We have lowered both our FY24 and FY25 EBITDA forecasts by 4-6% to reflect negative downward revisions in PGM prices [...] . However, the balance sheet for JLP remains strong for its modest growth ambitions," the broker said.

"We lower our target price on JLP by 8% to 12p (from 13p) which reflects our weaker earnings forecast near term."

However, looking forward, Canaccord said it expects a pick-up in earnings from the second half of the current fiscal year onwards, though "delivering on production guidance will remain a key focal point for investors in the coming quarters".

The broker said the range of fair value estimates for Jubilee now extends from 7p on the low end to as high as 17p over the longer term, and so provides "good potential upside to our revised target price".