Broker tips: 3i Group, Diageo, Direct Line
Morgan Stanley downgraded 3i Group on Wednesday ‘equalweight’ from ‘overweight’ and cut the price target to 3,192p from 3,246p as it said the risk/reward is more balanced after a strong run.
The bank said 3i offers significant appeal, given the strong compounding characteristics at key asset Action. But with more than 10% upside to its price target after a strong sustained run - the shares are up 125% since start of 2023 - it is moving to 'equalweight'.
Morgan Stanley noted that 3i's valuation is close to the historical peak of around 1.4x P/NAV based on March 2024 NAV. It also said gearing to capital market recovery and a re-acceleration at Action are key to upside.
As a result, the bank trimmed its NAV estimates by around 2% for FY25-27 following the AGM statement, which indicated modest moderation in Action like-for-like growth.
Citi upgraded Diageo to 'buy' on Wednesday and lifted the price target to 3,000p from 2,825p as it pointed to "a cocktail of opportunities".
The bank said that persistent earnings per share downgrades and concerns that the business model is structurally broken have driven PE relatives to long-run lows.
"However, with earnings/valuations metrics troughing in our view, and destocking headwinds likely to give way to positive earnings momentum in FY25E, we think an inflection point has been reached," it said. "As such, Diageo's July FY24E results should act as the clearing event which allows investors to revisit what remains an attractive compounding growth story."
Citi said that with investor positioning supportive, it believes the stock could re-rate +20% over the next 12-months.
Analysts at Berenberg slightly lowered their target price on insurer Direct Line from 220.0p to 215.0p on Wednesday as it said the risk of the stock "disappointing" was now rising.
Berenberg noted that investors still believe, given Direct Line's low consensus price-to-earnings ratio in 2026 of 8.0x and a 2026 estimated dividend yield of 9.5%, that there was scope for the company to outperform. However, the Berenberg remains cautious on several fronts and believe the risk of disappointment to be rising.
The German bank, which has a 'hold' rating on the stock, updated its estimates to better reflect restructuring guidance that Direct Line has given and shift its share buyback expectations back to the group's FY24 results rather than its capital markets day on 10 July.
"We now sit below consensus materially on motor policy count, motor operating profit, solvency and DPS in 2025 and 2026. The thought process of some investors was that, as UK motor pricing was rising so quickly, they should buy the weakest stock to generate the biggest return," said Berenberg.
"However, in our view that recovery in UK motor profits for Direct Line is fully priced in, and now we view risk as skewed to the downside, particularly given that Direct Line has guided to peak margins being achieved in 2026 – as UK motor pricing flattens, the risk of the company missing this guidance is rising."