Broker tips: Inchcape, Energean, British American Tobacco, WH Smith
By Iain Gilbert
Date: Monday 27 Jan 2025
(Sharecast News) - Last week's sell-off in Inchcape's shares was overdone, according to analysts at Citi, which retained a 'buy' rating on the stock.
Inchcape tumbled on Thursday after JPMorgan Cazenove downgraded the car dealership to 'neutral' from 'overweight' and slashed the price target to 800.0p from 1,050.0p, saying investors should "prepare for increased volatility ahead".
However, according to Citi, the recent share price move was "hard to justify", and the bank has left its forecasts and target price unchanged.
"We believe that Inchcape has a unique opportunity to consolidate the automotive distribution market. Our 10 December report shows that a FY24 share buyback could support double-digit EPS accretion. Our 2025E adj. PBT forecast of £525m is 6% above company-compiled consensus," Citi said.
Citi also noted that Inchcape trades at just eight times forward earnings.
Analysts at Berenberg lowered their target price on exploration and production firm Energean from 1,045.0p to 940.0p on Monday following the group's recent FY trading update.
Berenberg said Energean retains "a strong long-term cash-flow profile" but stated that in the short term, it only forecasts a low-single-digit FCFE yield, before disposal proceeds, as the company invests in growing its asset base in Israel.
The German bank also lowered its dividend assumption to $1.40 per share, a roughly 11% yield, from FY25 to enable leverage to return to the Energean's target range over the medium term.
Energean also guided to production of 120,000-130,000 barrels of oil per day in 2025, 11% below Berenberg's previous forecast, after accounting for some shutdowns to complete development work.
"The reduced production outlook means our revenue forecasts fall 13%. Our EBITDA forecast is 15% lower, after factoring in cash opex guidance of $410m-$440m, and our EPS forecast is now 22% lower," said Berenberg, which has a 'hold' rating on the stock.
UBS upgraded British American Tobacco on Monday to 'buy' from 'neutral', hiked the price target to 3,900.0p from 3,000.0p and made the stock its 'top pick'.
The bank said it expects BAT's Velo nicotine pouches to accelerate sales growth in New Categories to 16% in FY26, enabling the group to deliver its 2026 outlook.
"Also, there could be flexibility in BAT's 25.5% stake in ITC, for larger buybacks/ debt reduction," UBS said, which could lead to a re-rating.
As a result, UBS said, BAT's estimated FY26 'stub' price-to-earnings of 6.6x is low.
"Helped by USD strength, we raise our FY25/26 EPS estimates by +3%/+5% - similarly above consensus including Canada - and raise our target price to £39.0 (from £30.0), which is based on a FY26E P/E of 9.5x (-10% discount to the tobacco sector versus -7y average of circa -20%), rolled-forward," it said.
A potential sale of WH Smith's high street business would remove a reason not to buy the shares and make it a more attractive "pure-play", RBC Capital Markets said in a note on Monday.
WH Smith confirmed earlier that it was looking at potential strategic options for its high street stores, including a possible sale of the "profitable and cash-generative" unit after media speculation over the weekend.
RBC said that such a move would allow management to focus on the more attractive travel business, which accounts for 85% of trading profit.
RBC noted that in the ten years prior to the pandemic, WH Smith managed to improve its EBIT margin by around 500 basis points, despite seeing its sales almost halve in that time. This was due mainly to a successful shift towards higher margin categories like stationery, and also due to multi-year cost savings, the bank said. However, since the pandemic, its profitability has taken a step down.
"WH Smith continues to work on optimising its space, e.g. with its recent partnership with Toys R Us, but we think the outlook for High Street looks challenging given pressure on footfall," RBC said. "As such, we would view a potential sale as a positive as it would remove a key overhang on the shares."
RBC also said it sees potential for WHS to push further into food to go, including in the key US market, which it thinks is currently underserved in this area. RBC rates WH Smith at 'outperform' with a 1,400.0p price target.
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