Broker tips: Experian, Darktrace, Direct Line
By Alexander Bueso
Date: Wednesday 25 Jan 2023
(Sharecast News) - Credit Suisse downgraded Experian on Wednesday to 'neutral' from 'outperform' and cut the price target to 2,900p from 3,250p as it said the shares look "fairly valued".
"One reason we believe Experian trades a higher multiple (circa 28x P/E) relative to our European payments and business services coverage is the perceived moat around the vast pools of data it collects from businesses and users to then monetise several times over," CS said.
"This moat is expected to last long into the future because of how scarce data is, or appears to be, hence extending the period before Experian fades to its terminal growth rate."
Credit Suisse said the company's long-term stated targets imply earnings per share growth in the mid-to-high single-digit range, and PEG (price/earnings-to-growth) of around 2.8x, versus around 1.8x and 1.7x, respectively, for Visa and Mastercard, which have a similar moat with $15tr+ in global transactions, and around 1.5x for Adyen, which is the bank's top pick.
"We believe that this moat will withstand competition in the coming years as data ownership returns to individuals (via Open Banking/Data), democratising the key asset Experian sells: data (circa 50% of revenues).
"In our view, Experian is a high-quality company with preferred positioning within its core markets, expanding to additional verticals, and executed a 2015-16 turnaround; however, we see it as fairly valued at current levels."
Analysts at Morgan Stanley upgraded their recommendation for shares of Darktrace from 'equalweight' to 'overweight', arguing that the "broader growth story remained intact",
In their opinion, the slowdown seen in constant currency annual recurring revenues over recent quarters - which they had anticipated - was mostly the result of tougher comparables and macro factors.
"Macro weakness bites: In our initiation last September, we flagged that - while we were confident in Darktrace's product and market positioning - there were several factors that kept us Equal-weight.
"One of these was the potential for purchases of Darktrace's relatively greenfield platform to be more discretionary in a tougher macro environment,and that this could lead to deferral of purchase decisions. We see evidence of this playing out [... ]," the analysts said in a research note sent to clients.
"Combined with the most recent company guidance being "sufficiently cautious" and with the shares changing hands on approximately 2.1 times their estimate for its 2024 enterprise value-to-sales, the valuation was "sufficiently cheap".
Morgan Stanley did however trim its target price for the shares from 425.0p to 410.0p.
Berenberg downgraded Direct Line on Wednesday to 'hold' from 'buy' and slashed the price target to 160p from 272p, as it said investors should be prepared for no dividend per share for 2023.
"The debate on Direct Line continues to rumble on," Berenberg said.
"The company is trying to recapitalise itself and questions persist about how best and how quickly it can do this. Our base-case assumption - this is the part investors may need to brace themselves for - is that Direct Line will also not pay a dividend for the whole of FY 2023 (this is in addition to not paying the final 2022 dividend, which has already been announced)."
The bank said that while it reckons Direct Line has the ability to generate good returns in the long term, if the cancelling of the dividend is announced, this would lead to further underperformance - hence the rating downgrade.
However, it also said that not paying a dividend could be the right option.
"In our view, Direct Line has four options to recapitalise itself: raise capital, raise debt, increase the use of reinsurance, or stop capital distributions," Berenberg said.
It argued that cancelling the 2023E dividend is the most effective and cost-efficient way for Direct Line to recapitalise, and it helps to preserve the value of the shares over the long term, rather than potentially devaluing them permanently if the other options were utilised.
"Not paying the dividend would bring solvency back into a more comfortable range by December 2023 - at around the 167% mark, we estimate," it said.
Berenberg said it had cut the price target to reflect a higher cost of equity associated with the shares.
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