Broker tips: Ashtead, DiscoverIE, Direct Line Insurance
By Iain Gilbert
Date: Tuesday 03 Dec 2024
(Sharecast News) - RBC Capital Markets upgraded equipment rental firm Ashtead on Tuesday to 'outperform' from 'sector perform' and hiked its price target on the stock to 7,450.0p from 5,200.0p.
The Canadian bank said it has become increasingly optimistic on the prospects for the US economy relative to the rest of the world.
"We are aware that this is the broad consensus already but, taking our cues from the FX and fixed income markets, we think this could re-invigorate US construction activity which has been adjusting to higher interest rates," it said. "This should kick-start more positive earnings per share momentum for Ashtead after an underwhelming 12 months."
RBC said that with almost 95% EBITA exposure to the US, Ashtead was likely to screen well for international investors and was one of only a few ways to gain such exposure in the FTSE 100. It also said demand improvement should clear the current supply overhang.
RBC added that second-quarter earnings due next week have the potential to surprise positively.
Shares in DiscoverIE jumped on Tuesday after interim results from the electrical components group impressed, with the stock given an additional boost from Shore Capital which lifted its recommendation from 'sell' to 'hold'.
The broker said that, with shares having fallen 13% since it downgraded the stock in July, its valuation was up with events.
First-half results from DiscoverIE were in line with market expectations expectations following a detailed trading update in October, with revenues down 5% at £211m and adjusted operating profits down just 2% at 29.1m, as the bottom-line decline was tempered by a 1.4 percentage-point increase in the organic gross margin.
"We lower our revenue forecast for FY25F by 2% with Q3 sales still down organically YoY but maintain our profit forecasts. We see less risk of a profit downgrade for FY25F following a strong margin improvement in H1 and guidance of a further uplift for the full year," Shore Capital said.
The broker added that the company was "well placed to benefit from a range of long-term trends", with the business exposed to attractive end markets, but stated that these exposures were captured in the equity rating and sees more upside elsewhere.
Analysts at Berenberg raised their target price on Direct Line Insurance from 215.0p to 270.0p on Tuesday following Aviva's non-binding 250.0p per share offer for the group.
Berenberg said Aviva's takeover bid showed there was "clear interest" for the company from the UK's largest insurer. However, Direct Line's response that the offer was "opportunistic "made it believe that management sees "a clear path" to the execution of its strategic plan and that this may be potentially quicker than first planned.
The German bank believes that the UK motor insurance market is set for consolidation and that this will likely lead to higher and less volatile margins through the cycle.
Berenberg thinks that Aviva has the ability to pay more and still generate upside for its shareholders, given its roughly 11% market share in UK motor insurance and an approximately 14% share in UK home insurance.
In addition to the increased target price, Berenberg also reiterated its 'hold' rating on the stock.
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