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Broker tips: HSBC, Reckitt Benckisser, Watches of Switzerland

By Iain Gilbert

Date: Tuesday 23 Apr 2024

Broker tips: HSBC, Reckitt Benckisser, Watches of Switzerland

(Sharecast News) - Citi said on Tuesday that it remains 'overweight' UK banks, with HSBC one of its top picks.
"UK domestic banks appear to be back in favour, with investors stepping in ahead of an expected trough in NIMs, which should differentiate them to eurozone peers," Citi said.

"While we do not expect this to occur until 2Q24, we should see further evidence that the decline in NIMs is slowing with 1Q24 results, which should support a continued re-rating."

In contrast, HSBC was the only large European bank to de-rate year-to-date, which Citi attributed to a complicated set of 4Q23 results.

"We expect the 1Q24 results to be much cleaner, which combined with strong non-NII growth and clearer outlook communication, could drive consensus earnings upgrades."

Jefferies upgraded Reckitt Benckiser to 'hold' from 'underperform' on Tuesday and lifted its price target on the stock to 4,400.0p from 4,100.0p as it noted the shares were down 23% year-to-date after a disappointing FY23 and "shock" US litigation risk.

Jefferies said the increased price target mostly reflects a reduced assumption on US litigation liability risk, related to NEC in premature babies and the alleged association of infant formula usage and negligent practices by some suppliers. NEC is a serious gastrointestinal problem that mostly affects premature infants.

"This is in part prompted by the formal stance taken by the NEC Society last week, which advises that recent litigation outcomes 'may result in unintended harmful consequences for babies & elimination of potentially beneficial therapy choices'," it said.

In the short term, Jefferies said it still considers some downside risk with 1Q24 sales. However, it said that at current levels, downside on the stock seems contained.

"Our 2026/27 estimates are cut (circa 3% at EPS) on an accelerated rebasing of margin expectation," it said. "We continue to see an op margin of 20-21% (versus 2023 23.1%) as more viable mid-term, if we are to see more consistent/sustained sales growth," it said. "Persistent uncertainties on strategy & litigation remain for the next 12 months. However, the skew to downside risk is more firmly established in the price. The company now has an opportunity to take control of some ambiguities, and set the investment case on an improved footing - so we move to hold."

RBC Capital Markets has slashed its target price for Watches of Switzerland Group ahead of its full-year trading update next month, projecting a "tough" luxury watch market.

The broker cut its target for the shares from 475p to 425p after reducing next year's revenue and EBIT estimates by 9% and 11%, respectively. However, it kept an 'outperform' rating on the stock.

RBC expects WOSG to deliver on lowered guidance for the year ending 30 April when it reports its pre-close trading update on 16 May, though it predicts revenues will be at the bottom end of the guided range of £1.53-1.55bn "due to a slight moderation in US trends for non supply constrained watches (based on Swiss watch exports data YTD)". The broker is also pencilling in EBIT of £147m at a margin of 9.6%.

For the next financial year, the broker reckons WOSG will guide to revenues of £1.60-1.65bn excluding the impact of acquisitions, with EBIT at £161m and broadly flat EBIT margin guidance due to fewer and later store openings.

"For FY25E we expect to see cautious revenue guide with limited/no margin expansion, given tough cyclical dynamics in luxury watches which will likely continue for 1H25E," RBC said.

"Sentiment remains low in WOSG, although we view its supplier relationships as more valuable than the market currently ascribes."

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