Broker tips: The Gym Group, MP Evans

Analysts at Berenberg upgraded their stance on The Gym Group from 'hold' to 'buy' on Monday and hiked their target price on the stock from 121.0p to 180.0p, stating the company was "in good shape".

Berenberg said The Gym Group had "a tough 2023", with a substantially reduced number of site rollouts, fairly underwhelming growth and significant margin deterioration.

"We therefore entered 2024 happy to wait for signs of improvement in the business," said Berenberg.

The German banks stated The Gym Group's recent H1 trading update had left it feeling "encouraged" that the group was in good shape.

Furthermore, Berenberg stated its analysis suggested there was still "significant white space" to grow into, that cost pressures were subsiding and that there was scope for potential shareholder returns as the business continues to generate cash.

"The business is very cash-flow-generative and we estimate cash conversion from EBITDA pre-expansionary capex of 60%. With new sites fully funded through FCF, we estimate leverage will fall to the bottom end of the target range, leaving scope for shareholder returns," it concluded.

Over at Canaccord Genuity, analysts initiated coverage on Indonesian palm oil supplier MP Evans with a 'buy' rating and 1,250.0p target price on Monday, highlighting the group's "strong financial returns".

Canaccord Genuity said MP Evans had a "strong sustainability case despite palm oil's challenging reputation", with palm oil boasting one of the highest crop yields of any vegetable oil, making it highly efficient compared to alternatives like soybeans.

The Canadian bank stated that MP Evans' business centres on milling and plantations, with roughly 65% of its in-house output certified as sustainable and its mills among the industry's most efficient, generating higher output from the same agricultural input.

"Over the past five years, MP Evans has more than doubled its milling capacity, now deriving about 40% of its gross profits from milling its own and third-party crops," said Canaccord. "With strong returns on capital (circa 15% in 2023) and significant free cash flow ($45.0m in 2023), we see multiple routes for further value creation, all funded through its free cash flow."

"We estimate the existing plantations at approximately $644.0m and the mills at around $181.0m; with the current minimal debt, we set our base value at roughly $810.0m (around 1,160.0p/share). We see the potential for expansion, including a new mill and additional plantations reaching about 56,300 Ha (wholly owned), which adds a net value of approximately $40.0m. This accounts for the deployment of capex and acquisitions, resulting in a total value of $850.0m."

Reporting by Iain Gilbert at Sharecast.com