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Broker tips: SSP, Rentokil, Aston Martin

By Michele Maatouk

Date: Monday 17 Jun 2024

Broker tips: SSP, Rentokil, Aston Martin

(Sharecast News) - Goldman Sachs downgraded SSP on Monday to 'sell' from 'neutral' "on a relative basis" as it took a look at European travel concessions.
The bank slashed its price target on SSP to 160p from 255p. It said that while SSP has an attractive long-term growth opportunity, it expects the shares to continue to underperform within its coverage on a 12-month investment horizon. It sees further downside risk to earnings per share consensus estimates for FY25/26 and relatively limited free cash flow generation over the next three years.

"This contributes to our relative preference for WH Smith over SSP within our European travel concessions coverage," it said.

Goldman said WH Smith offers exposure to similar structural growth themes to SSP - e.g. global passenger growth tailwinds, significant potential for new contract wins in key markets like North America - with similar net contract win growth for its travel business on the bank's forecasts - but at a more attractive valuation with stronger cash generation and a more compelling catalyst path. This includes scope for earnings upside and a potential inflection of US LFL trends in the coming quarters.

"Furthermore, when screening against our broader travel & leisure coverage, we note that SSP screens among the lowest on fundamentals, while WH Smith screens broadly in-line with the sector median," GS said.

Goldman rates WH Smith at 'buy' with a 1,540p price target.

RBC Capital Markets said it continues to see "significant" upside for Rentokil Initial shares, "although clearly there is still lots to do, with peak branch integration still 12 months away".

The bank said Rentokil has remained a very volatile stock.

It updated its EPS forecasts for forex (-1 to -2%), and said it expects in-line first-half results with acceleration of US organic growth through this year.

"We note the Trian investment, but believe it changes little - key for the share price is delivery on NA organic growth and the TMX integration," RBC said.

In the short term, the bank said it sees re-rating potential as NA growth accelerates and as confidence in the story rebuilds.

"Longer term, we continue to believe RTO is very well positioned within a defensive, good growth industry...we expect management to execute on the TMX integration, and we see re-rating potential as organic growth, cashflow, return on invested capital and leverage improve and the risk profile reduces."

In addition, RBC noted the "lowly" implied valuation of the NA business within the price today.

RBC kept its 'outperform' rating and 590p price target on the stock.

Jefferies cut its price target on Aston Martin Lagonda shares to 250p from 275p as it pointed to reduced earnings and delayed deleveraging.

The bank, which rates the shares at 'buy', said Aston Martin "continues to test investor patience", with the second quarter set to deliver earnings on par with Q1 leading management to draw down recently expanded credit lines.

"Meanwhile, initial feedback on new products and lean dealer inventories also create a supportive environment to ramp new models," it said.

Jefferies said debt refinancing has bought time to go through another (guided) weak second quarter.

"Little room for error after that, and AML will probably draw on its credit line by end Q2 to keep liquidity in excess of customer deposits," it noted. "That said, initial feedback on new products and a few dealer checks showing lean inventories support the sharp increase in activity implied in guidance.

"Recent weakness in demand at the high end of the car market is a concern but AML's volume ambitions are well within the brand's historic volume.

"Our main concern remains the ability to ramp up production to circa 5k units in H2 considering quarterly output has not exceeded 2.5k units in the past."

Jefferies said it continues to see value in AML's "rare attributes combining exclusivity, history, price points, Specials and racing which are only second to Ferrari among exclusive auto brands, in addition to potential M&A interest".

It added that 2024-25 estimates, AML is trading on 1.4-1.2x revenue and 6.3-4.8x EBITDA.

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