Broker tips: AO World, Dechra, Melrose, Elementis

AO World reported an £18.3m first-half profit on Tuesday compared with a £5.9m loss the year before as online purchases boomed during the Covid-19 crisis. Founder and chief executive John Roberts said it was "a half year like no other" marking a permanent shift in shopping habits.

UK growth surged and the FTSE 250 company's once-struggling business in Germany "has been unequivocally fixed" by soaring demand, Jefferies analyst Andrew Wade said. Wade increased his full-year earnings estimate by £4m to £68m and upped his price target on the shares to 400p from 285p.

However, Wade reduced his rating on AO shares to 'hold' from 'buy' to reflect their jump from 90p at the start of 2020 to 379p as investors homed in on the company's potential to gain from rapidly shifting consumer behaviour.

"We continue to view AO as a strong growth story as it leverages enduring market shifts, develops the broader AO ecosystem, and builds scale in newer categories and territories," Wade wrote in a note to clients.

Analysts at JP Morgan Cazenove raised their target price on veterinary pharmaceuticals group Dechra from 3,200.0p to 3,600.0p on Thursday, stating they expect a year of "strong topline growth" to take place in 2021.

Despite lingering pressures from Covid-19, JP Morgan still sees Dechra delivering 11% revenue growth in the coming year, or 5% on an organic basis, and after also reflecting increased research and development investment and dilution from the company's June equity raise, the analysts still see roughly 5% core earnings per share growth.

Looking beyond 2021, JPM expects organic earnings per share growth to accelerate to "a double-digit" compound annual growth rate for 2022-24, with continued strong topline and margin expansion.

"Our forecasts could also prove conservative for 2021 and beyond, given the recent Covid-19 prompted spike in dog ownership, which could translate into a demand boost for Dechra products," added JPM.

Royal Bank of Canada increased its price target and earnings estimates for Melrose Industries and said the potential sale of Nortek Air could further boost the shares.

Melrose's second-half trading was ahead of RBC's expectations reflecting a recovery at the auto business and strength at the US Nortek air-conditioning business.

RBC analysts increased their earnings estimates by 29% for 2021 and 13% and upped their price target for Melrose shares to 205p from 160p. Mark Fielding and colleagues kept their 'outperform' rating on the shares.

Melrose buys industrial businesses and aims to improve their performance before selling them. Its purchase of aerospace engineer GKN has been caught in the aviation industry's biggest crisis but RBC said a sale of Nortek was on the horizon.

"The potential sale of Nortek Air in H1 2021 should be a further positive catalyst beyond trading recovery," Fielding wrote in a note to investors.

Analysts at Berenberg raised their target price on diversified chemicals group Elementis from 100.0p to 145.0p on Thursday, stating that independence was the "surest path to value".

Berenberg said one of the benefits of the last few weeks' rally in the shares of cyclical companies was that it enabled an "altogether more realistic assessment" of the value of names like Elementis.

The German bank said multiples for comparable companies had all rallied heavily, and the pick-up in automotive and industrial lead indicators bode well for the chromium and talc segments in particular.

Berenberg, which also reiterated its 'buy' rating on the stock, highlighted that the organic de-levering story of the next two to three years was the most likely path to value creation for Elementis shareholders, in its view.

The analysts also noted that they do not believe a deal with Mineral Technologies will take place and added they suspect that Mineral is "well aware" Elementis share are undervalued if it de-levers.