Broker tips: Diageo, Just Eat Takeaway, Carnival

The bank said it believes US Spirits growth has slowed and it fears that inventory levels may overshoot requiring shipments to lag depletions. In addition, DB sees Diageo as being at risk of cyclical headwinds as consumer spending comes under pressure.

"We believe the valuation is stretched given Diageo is the only European beverages company that doesn’t trade at a discount to its three-year/five-year average price-to-earnings," it said.

"We, therefore, believe Diageo needs upgrades to outperform and see that as increasingly unlikely as macro and category headwinds build."

Berenberg initiated coverage of Just Eat Takeaway on Wednesday with a 'sell' rating, saying that near-term trading will remain muted and the Grubhub sale will disappoint, sending shares in the food delivery company tumbling.

The bank, which set a €16.30 price target on Just Eat, said the valuation fails to take into account the negative value associated with the company's operations in various geographies that are unlikely ever to make money given stiff competition from multiple operators.

It reckons the company will struggle to achieve consensus value for the Grubhub asset, and that it will need to retain the proceeds of the transaction due to a funding gap but said the biggest issue for Just Eat was the long tail of markets.

"While JET is losing money in both the US and the UK, we see a resolution for both operations," it said. "This is not the case for most of the long-tail markets in the group, however. JET faces stiff competition in many of these markets, which are likely to remain a substantial drag on group profitability. While JET has undertaken some portfolio rationalisation, it needs to go much further."

As far as the funding gap is concerned, Berenberg estimated that Just Eat would need to raise around €1.0bn in new funding to achieve free cash flow breakeven if it were to do nothing with the portfolio.

"We estimate that the disposal of Grubhub could bring in a net $400.0m (including closure of the logistics business), but this still means a need for over €500.0m in new funding, reflecting ongoing negative free cash flow and the maturation of a number of debt facilities and convertibles," it said.

Morgan Stanley slashed its price target on shares of cruise operator Carnival on Wednesday to $7 from $13, maintaining its ‘underweight’ rating and staying cautious following "another chunky forecast cut".

MS cut its price target for Carnival UK shares to 575p from 1,050p, and said that in a bear case scenario, the stock price could reach $0.

The bank said: "Carnival’s liquidity of $7.5bn appears to give it a solid cushion given cash burn is improving…but the company has $4bn of debt maturing in the next 18 months, and $5bn of its cash is customer cash.

"Therefore, if the high yield market closes, and/or if there is a demand shock that causes trip cancellations or weak bookings (and hence customer deposit outflows), liquidity could quickly shrink.

"Even then, leverage looks unsustainably high we think, with net debt remaining more than $30bn for the foreseeable future, nearly triple its pre Covid level. We think this needs to come down to under 4xFY23, to around $20bn or so, which implies a circa $12bn equity raise."

MS said this is similar to Carnival’s market cap, so could require a material and therefore likely very dilutive, discount.

"If its equity value drops much further, it could become very challenging to raise this much," the bank said. "We introduce a new $0 bear case, and reduce our price target by nearly half."

MS said it was cutting its forecasts again following the company’s "weak" second-quarter results and guidance. The bank’s FY22 EBITDA forecast drops from $0.9bn to a loss of $0.9bn due to weaker-than-expected occupancies, weakening pricing, elevated unit costs and higher fuel costs.

In addition, its FY23 EBITDA forecast drops 10% to $5.0bn as it factors in some occupancy pressure from continuing health protocols over the winter, as well as weaker pricing. MS’s earnings per share forecasts come down more due to higher financing costs, with a 63% increase in FY22 losses, a 46% downgrade to FY23 EPS and a mid-teens downgrade thereafter.