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Broker tips: Hikma Pharmaceuticals, Unilever, Rentokil Initial, Flutter Entertainment

By Iain Gilbert

Date: Tuesday 27 Feb 2024

Broker tips: Hikma Pharmaceuticals, Unilever, Rentokil Initial, Flutter Entertainment

(Sharecast News) - Analysts at Berenberg raised their target price on drugmaker Hikma Pharmaceuticals from 1,960.0p to 2,000.0p on Tuesday, citing more stability in its generics unit.
Berenberg said Hikma had "a solid finish to 2023" across all three of its divisions, with guidance roughly 300bp ahead of consensus group revenue estimates, mainly due to its generics division, and in line with estimates for operating income.

The German bank, which reiterated its 'hold' rating on the stock, pointed out that management noted "a very strong December" for its injectables business, and that US generics pricing had remained stable versus 2023.

Berenberg also highlighted that in the Middle East and North Africa, Hikma was growing ahead of the market, and was now the second-largest branded pharmaceutical company by revenue, after Sanofi.

"We adjusted our estimates to reflect slightly better generics earnings and our price target moves up to £20. Hikma's shares are up 14% year to date and trading on c8.5x 2024 EV/EBITDA (a slight premium to peers), with an improved outlook and guidance looking to be priced in for now," said Berenberg.

Morgan Stanley downgraded Unilever on Tuesday to 'underweight' from 'equalweight' and cut its price target on the stock to 3,775.0p from 4,100.0p.

The bank said that while it's not significantly below consensus on earnings, it thinks Unilever's re-rating - to a small premium to Staples - has been overdone, particularly given weaker cash conversion and higher emerging markets exposure, relative to peers.

Morgan Stanley noted that following a stronger performance in recent weeks, Unilever now trades at 17.6x 2024e price-to-earnings versus European Staples overall, on 17.4x.

"With correlation between organic sales growth and P/E particularly strong in this sector, the fact that Unilever's medium-term growth rate looks likely to be broadly consistent with the rest of the sector suggests that a re-rating is unlikely," it said. "Meanwhile, given weaker cash conversion versus other HPC peers - the company has consistently high restructuring charges which it excludes from underlying EPS and operating profit - the stock currently offers only a 3.4% unlevered free cash flow yield for FY24."

MS said that while it thinks management's strategy looks sensible, it was unclear what will drive a further re-rating over the next twelve months.

RBC Capital Markets has reiterated an 'outperform' rating and 575p target price for Rentokil Initial ahead of the pest control group's full-year results next week.

"We continue to see the stock as extremely good value post its de-rating and remain at 'outperform'," the broker said.

With no updates or newsflow from Rentokil since the company's poorly received third-quarter results in October, the annual results will be closely watched on 7 March. Shares dropped sharply at the time of the third-quarter update after the company noted softer consumer demand in North America with new residential customer acquisition being challenged by the macroeconomic backdrop.

The Canadian bank noted that stock still stands 27% lower than the day before the results - trading at 432.8p by 1021 GMT, down 0.6% on the day.

"We expect in line results, with the potential for a better Q4 US run rate (given ROL commentary and website trends)," RBC said. "Key will be the 2024 outlook - consensus has come down, we think, to realistic levels even with some incremental sales/marketing spend, but an update on the integration remains key."

Barclays upgraded Flutter Entertainment on Tuesday to 'overweight' from 'equalweight' and lifted its price target to 200.0p from 153.0p, citing multi-year earnings growth.

"Flutter offers an attractive +33% 2024-26E earnings per share compound annual growth rate as the US becomes increasingly profitable," the bank said.

Barclays said the US market share has proven resilient despite new entrants.

"Following a scenario analysis, we raise US 2024/25E EBITDA circa £70m/£160m, driving group EPS +5%/+13%," said Barclays, which also noted that its new price target implied 20% upside.

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