Broker tips: Fevertree, Burberry

Berenberg, which reiterated its 'buy' rating on the stock, said Fevertree's trading update on 19 May was "positive", with momentum yet to abate despite the softening consumer backdrop.

The German bank noted that on-trade activity continued to improve, cost inflation appeared in line with expectations so far, and added that it was yet to see any deterioration in demand.

"While the summer and December holiday periods are the most important trading windows for Fevertree, it has started FY22 well. On-trade activity has continued to improve, and CGA data shows that spirits are materially outperforming beer and wine," said the analysts.

Berenberg stated that while it acknowledged risks relating to softening demand, it also thinks that Fevertree looks "increasingly attractive" in the context of its material de-rating versus peers, initiatives to improve margins, and its exposure to structural growth trends.

"Commodity costs have not materially changed since Fevertree issued its revised guidance on 16 March. We think that margin expectations have been rebased to a level that reflects the current cost environment, while other companies with more exhaustive hedging policies will experience a gradual realisation of higher costs," said Berenberg.

"We thus think there is less risk of a continued downgrade cycle versus peers, which is important in the context of Fevertree's material de-rating. We think these dynamics make Fevertree increasingly attractive versus peers, and with our views on the long-term revenue and margin potential unchanged, we reiterate our 'buy' rating."

Analysts at Deutsche Bank lowered their target price on fashion house Burberry from 2,280.0p to 1,950.0p on Monday but said the group appeared to be doing a good job of "navigating uncertain waters".

Deutsche Bank noted that Burberry will provide more details on its strategy in November but it appears that one of the firm's priorities will be investing gains from operational leverage back into the business to drive revenue growth.

The German bank said Burberry's brand strength had been aided by its elevation strategy and price increases that have been accepted by its consumer, while its robust cash generation was supporting a £400.0m share buyback during the 2023 financial year.

DB also made some small adjustments to its earnings forecasts after Burberry's 2022 financial year earnings beat and higher FX impacts largely offset an underlying cut to earnings on the back of a weaker first-half performance in China.

"We maintain our forecast of HSD constant FX sales growth for the next few years before fading to MSD% in FY27e and LSD% by FY30e. We cut our FY23e PBT forecast by -3% and FY24e by -6%. We now forecast 10% EPS growth in FY23e and 9% in FY24e. We lower our DCF-derived price target to 1950p largely in line with our slightly more cautious view on earnings and increase in WACC to 9% (from 8.5%) which implies c.19x Cal 22 PE compared to the current c.15.5x," said the analysts.

"We maintain our 'hold' recommendation as we can see the shares largely trading in line with the sector until there is more clarity on China and the strategic plan update."

Reporting by Iain Gilbert at Sharecast.com