Broker tips: Close Brothers, Frontier Developments

Analysts at Canaccord Genuity slapped merchant banking group Close Brothers with a double downgrade from 'buy' to 'sell' and cut their target price on the stock from 1,483.0p to 992.0p, warning that macro risks had still not been "fully priced in".

Canaccord Genuity said on Wednesday that it believes consensus forecasts are likely to be subject to "material downgrades" to reflect "a more realistic outlook" for its banking division in a UK recession in 2023.

"Currently consensus forecasts a 4% decline in adjusted basic earnings per share in FY23, followed by 17% year-on-year growth in FY24. We believe this profile is unrealistic in a recessionary environment and expect meaningful consensus downgrades," said Canaccord.

In contrast, the Canadian bank forecasts an 18% decline in adjusted basic earnings per share in the 2023 trading year, followed by a 2% decline in 2024, before returning to 18% year-on-year growth in 2025.

Canaccord added that it believes the key sensitivities for the banking division were net interest margin and the bad debt ratio.

Analysts at Berenberg downgraded video game developer Frontier Developments from 'buy' to 'hold' on Wednesday and slashed their target price on the stock from 2,000.0p to 620.0p, stating there was "significant uncertainty" as headwinds continue to grow.

Frontier Developments released a major profit warning on Monday, with its growth and margin outlook heavily impaired, coupled with several operating challenges and growing macro headwinds.

Berenberg said that while Frontier's first-half sales of £57.0m in 2023, up roughly 16% year-on-year, were broadly in line with expectations, a very weak December trading performance had resulted in "a major cut to guidance". As a result, Frontier lowered its FY sales guidance to "not less than £100.0m" - down from £135.0m and a 2% reported underlying earnings margin.

The German bank also noted that after a mixed performance of the eight titles published by Frontier's Foundry offering, the unit is now under review.

"Given that we believe the core issue has been game selection and target market analysis, we believe Frontier will re-align Foundry to focus on its core genres only. Foundry will not publish any titles in FY 2024, and we remove it from any revenue projections in FY 2025 onwards also until a firmer pipeline is announced," said Berenberg.

"Frontier trades on 24x enterprise value/earnings before interest and tax and 29x price-to-earnings for year ending May 2024, falling to 16x and 18x in full-year 2025," added Berenberg.