Broker tips: Volution, Tesco

RBC Capital Markets reiterated its ‘outperform’ rating on Volution on Thursday, saying it continues to be a standout among its peers.

"We continue to see upside growth potential in FAN with its strong leadership team and dedicated workforce; disciplined approach to acquisitions; continuous improvement and lean manufacturing processes; expansive branded product range; and close customer relationships," the bank said.

"Given its solid performance in recently weaker markets, we expect FAN to continue to outperform as market conditions improve."

RBC said the company’s M&A strategy post Fantech now looks more likely to be bolt-on in nature.

It said there is still around £50m of firepower to potentially pursue additional acquisitions.

"We expect these to be focused more on EU markets to expand sales footprint/geographic reach; though unlikely to be anything immediate; and more likely to be bolt-on in nature," RBC said.

"FAN's leverage now sits at circa 1.5x and we could see it go as high as circa 2x if opportunities present themselves. Without additional acquisitions, we expect FAN to reduce leverage by about 0.5x/year, given average cash conversion of more than 90%."

RBC has a 700p price target on Volution.

Shore Capital maintained a 'buy' rating on Tesco after a "decent" trading update from the supermarket group, saying the retailer is well-placed to benefit despite a tough consumer backdrop.

Tesco's share price dipped in morning trade despite the company reporting that sales growth picked up from 2.8% in the third quarter to 3.8% over the Christmas trading period, which Shore Capital said was a "little ahead of consensus".

However, as the broker highlighted, despite a strong top-line performance, full-year profit guidance was unchanged - possibly as a result of additional investments such a 28,000-person increase in seasonal store staff.

"For a worried British shopper, even with rising living standards but hearing news of economic challenges, including rising gilt yields and the potential for tax rises, Tesco is showing that it is on their side, which means that it has probably foregone some scope to beat current market expectations to support ongoing earnings and cash flows," Shore Capital said.

Nevertheless, heading into Thursday's update, the broker said it was not expecting any upgrades to guidance, and that it continues to like the underlying strength of the business.

"Tesco is well set to face into the challenging UK consumer economy, where sentiment is rather weak and forthcoming cost pressures evident. We like the ongoing investment thesis of a cash compounder albeit sentiment and momentum are a little sideways today, but the stock could be a notable relative winner as matters unfold," Shore Capital said.