Broker tips: Synthomer, Ceres Power, GCP Infrastructure
Analysts at Berenberg lowered their target price on chemicals business Synthomer from 400.0p to 320.0p on Friday as it lowered its operating profit expectations for 2023-25.
Berenberg stated that cyclical stocks with high indebtedness "do not put investors at ease", noting that the more than 80% decline in Synthomer shares over the last 12 months was "a case in point". However, the German bank said it was "more optimistic".
"The firm has a leverage problem, although not a liquidity issue. Last year's £276.0m rights issue has bought time to recover," said Berenberg. "Construction market headwinds mean that the company will, in our view, show minimal progress in organically cutting its absolute net debt pile, even allowing for self-help."
Berenberg, which reiterated its 'buy' rating on the stock, noted that the moment a cyclical recovery, fast or slow, materialises, Synthomer shares should jump – perhaps as drastically as they have fallen.
"We have reduced our operating profit forecasts by a high-single-digit percentage on average for 2023-25, mainly reflecting lower construction-linked margins and volumes. Shares trade on 2025 price-to-earnings ratio of 4.2x, compared to long-run average of around 11.0x. Our price target would imply circa 9.0x," added Berenberg.
RBC Capital Markets downgraded Ceres Power on Friday to 'underperform' from 'sector perform' and slashed the price target to 150.0p from 600.0p on stalling momentum.
The bank noted it has been cautious on Ceres since initiating coverage of the shares in 2022, citing the lack of visibility surrounding its royalties-based business model.
"While we still admire the company’s ambitious positioning in the space, stalling momentum in the sector coupled with delays means Ceres has lower reserves and is yet to showcase the high-margin and mass-scale potential of its technology," it said.
RBC said it was cutting its licence fee and royalties assumptions for the rest of the decade. Its revenues and gross profit forecasts are down on average respectively 19% and 27% over 2023-30.
On the valuation side, in line with sector peers, it lifted its weighted average cost of capital assumption from 10% to 12% and lowered its end-decade earnings multiple from 25x to 20x. The price target has been lowered on these new assumptions.
RBC Capital Markets sees nearly 30% upside at GCP Infrastructure, saying the stock was "cheap and catalyst rich".
The broker initiated coverage of the FTSE 250 closed-ended investment company with a 'outperform' rating and 90.0p target price.
The stock has fallen by 30% over the past 12 months, but RBC says that an improved outlook "is yet to be fully reflected in the shares".
The shares are trading at a 37% discount to net asset value which "seems excessive", the broker said, with the discount being the highest in the renewable and infrastructure peer group. The broker's target price assumes a discount of 15% to net asset value.
"Higher rates have inevitably weighed on GCP's ~£1bn long-duration, debt-focused portfolio with shares declining ~35% since rate hikes began; but we now view reasons for optimism. Its newly announced ~£150.0m disposal process will simplify, derisk and delever the portfolio, and reduce exposure to key 'problem assets'. Meanwhile, an improving rate environment will provide a key macro catalyst for rerating" RBC said.