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Broker tips: M&G, B&M, Frasers Group, Frontier Developments

By Iain Gilbert

Date: Tuesday 28 Nov 2023

Broker tips: M&G, B&M, Frasers Group, Frontier Developments

(Sharecast News) - Analysts at Goldman Sachs initiated coverage on investment manager M&G with a 'buy' rating and 240.0p target price on Tuesday, stating it had "attractive growth, capital returns, and valuation".
Goldman Sachs noted that M&G operates three main segments - Asset Management, M&G Wealth, and Heritage. It said these were interconnected and, in its view, provide "attractive synergies".

"M&G is an asset manager with a large balance sheet which allows the firm to seed assets and helps to drive inflows, while also generating sufficient capital to cover its dividend and deleverage over time," said the analysts.

GS also highlighted that M&G trades on a 10.3% one-year average next twelve-month dividend yield, higher than the UK life peer average of 8.9%.

"This discount is unjustified in our view given M&G's diversified business mix, the quality of PruFund, leverage reduction and capital-light growth potential," said Goldman.

Citi has upgraded its rating on discount retailer B&M from 'neutral' to 'buy', saying the stock could stand to benefit from a resilient consumer landscape.

"Notwithstanding our forecasts for the strength of the UK's wage growth to fade and for unemployment to rise, our Household Available Cashflow (HAC) analysis of (nominal) discretionary demand suggests the UK will narrowly avoid a 'consumer recession'," Citi said in a research note on Tuesday.

The bank expects HAC to grow by 1.8% in 2024 - comprising 3.4% growth in the first half slowing to just 0.2% in the second - easing to 1.1% in 2025.

"With expectations for positive but sub-trend growth, we upgrade B&M [...] noting the quasi-defensive nature of its value-led proposition and circa 5% per annum space runway in a category with a 10-year trailing CAGR of 10%," the bank said.

Based on a price-to-earnings ratio of 15x, Citi has set a new target price for the stock of 640p, up from 540p previously, estimated a total shareholder return of 14-16% for the years ending March 2025 and March 2026. The bank added that B&M's recent bond issuance also paves the way for the continuation of its special dividends.

Barclays initiated coverage of Frasers Group on Tuesday with an 'overweight' rating and 1,060p price target, as it said the company was "poised for European expansion".

Barclays pointed out that Nike's chief financial officer recently mentioned Sports Direct alongside JD Sports and Dick's Sporting Goods as key partners. He also noted the fact that the CEO of Adidas welcomed the company's acquisition of SportScheck in Germany.

"Both of these comments reflect well on the elevation strategy under the leadership of CEO Michael Murray," it said. "We are well aware of the concern over the Direct to Consumer (D2C) push from the major brands. However, we believe that there is a small winner's circle of retailers that brands are prepared to back with high-quality products to help drive growth, as there are limits to D2C.

Barclays believes Frasers Group to be well placed to fulfill this role for the brands in European sporting goods, just as JD Sports has done in athleisure/sports fashion." It also highlighted the medium-term potential in financial services.

"Whilst currently at an early stage, we believe the group's nascent financial services division (via Frasers Plus) is an area of potential medium-term upside if it can be successfully introduced at the group's existing brands, and potentially in other companies (eg, those where Frasers has a financial investment)," it said.

Analysts at Berenberg lowered their target price on video games developer Frontier Developments from 210.0p to 170.0p on Tuesday on the back of news that sales of its Realms of Ruin title had been "underwhelming and materially lower" than many of its other franchises.

Berenberg said disappointing sales from Warhammer Age of Sigmar: Realms of Ruin had resulted in Frontier Developments downgrading its full-year revenue guidance to between £80.0m and £95.0m. Berenberg expects "tough trading conditions" to continue over the next six months, which is why its estimates sit at the low end of the firm's guided range.

The German bank noted that for it to turn "more positive" about the shares, it will need to see evidence of return on investment improving on its new releases but with the company's next new release not due until FY25, Berenberg thinks "there are few major catalysts" over the next 12 months.

"Frontier believes that it is still possible for the business to reach an 'adjusted EBITDA' (which adds amortisation and deducts development spend) loss of £9.0m, if revenue hits the top end of the range due to higher gross margins from favourable sales mix and cost cuts. Considering we expect the Christmas period and H124 to be a difficult period for indie/'AA' publishers, we cut our forecasts to the bottom end of the guidance range," said Berenberg.

"Given the high degree of operating leverage, this results in an adjusted EBITDA loss of circa £19.0m. Our FY24 net cash estimate falls to £5.7m (from £11.0m). Frontier expects to be adjusted EBITDA breakeven in FY25. We estimate it would need to generate revenues of circa £97.0m for this to be reached."

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