Broker tips: Direct Line, FeverTree, Naked Wines, Haleon

Deutsche Bank noted that Direct Line had warned on everything it was worried about and more - including its earnings outlook from now until the end of 2023, a flat ordinary interim dividend per share, the removal of the second £50.0m tranche of its buyback and a solvency ratio at 150%, its lowest since 2015.

"Altogether, with potential consensus downgrades in the order of circa 25% in 2022e and circa 15% in 2023-2024e, we think it is unsurprising that the shares are off 13% today, and we note that this is incremental to the -12% at the time of Sabre's (not covered) profit warning last Thursday," said DB.

Looking forward, the German bank believes that although Direct Line appears "incredibly lowly rated" at a 12.2% 2023 ordinary dividend yield against its historical average, it "could be a while" before it sees any real re-rating as the firm's COR guidance and capital outlook remains "constrained".

Barclays downgraded tonic maker FeverTree on Tuesday to 'equalweight' from 'ovewrweight' following its third profit warning in six months.

"Whilst many may perceive this to mark trough profitability, we lack conviction in the guidance," the bank said.

"FeverTree expects inflationary pressures to persist but will not take pricing until FY23E, whilst competitive pressures are expected to be intensifying and consumers slowing down.

"We continue to like FeverTree's long-term opportunity but until our confidence in margins can be restored, we believe near-term headwinds will overshadow long-term growth."

The bank slashed its price target on the shares to 1,000.0p from 3,030.0p.

Analysts at Berenberg slashed their target price on alcoholic beverages retailer Naked Wines from 690.0p to 140.0p on Tuesday, stating there were still more challenges ahead for the group.

Berenberg said Naked Wines' full-year results did little to mitigate its concerns over the viability of the company’s customer acquisition strategy or its exposure to macro headwinds.

The German bank noted that Naked Wines now expects "a material decline" in paybacks on marketing spend for its latest cohort, leading the company to downgrade full-year 2023 sales guidance.

Berenberg also stated Naked Wines was facing uncertainty over demand given weakening consumer confidence, as well as increased costs in the year ahead.

"Despite the significant de-rating in shares year-to-date, we believe that execution risk remains high and there could be more negative news to come," said the analysts, who retained their 'hold' rating on the stock.

Credit Suisse has initiated coverage of Haleon, GlaxoSmithKline's recently spun out consumer healthcare arm, at 'outperform' with a 368.0p price target.

The bank said Haleon is a "highly attractive" company. It said that as the only listed pure-play in Consumer Health - an industry with structural growth trends - Haleon's current valuation fails to recognise the company's scope to deliver above-guidance organic sales growth of 6.5% in FY22, followed by 4.5% in FY23.

It also fails to recognise the improved portfolio of the business (post recent M&A and divestments) and its ability to leverage scale as the clear global leader, with a market share twice that of its nearest competitor.

Credit Suisse said that based on its analysis of more than 100 country/category cell forecasts, it expects Haleon to deliver 4.2% organic sales growth per annum over the medium term, which reflects around 10 basis points a year of market-share expansion.

CS said Haleon has high quality earnings growth potential of circa 7.5% per year, benefitting from further margin expansion and reduced interest cost.

"Compared to consumer staples, the company has a relatively low exposure to input costs (less than 10% of sales) and emerging market currencies, and is likely more resilient in an economic downturn, in our view," it said.

It added that the step-up in cash conversion should allow the group to de-lever quickly.