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Broker tips: Homeserve, Next, Diploma

By Iain Gilbert

Date: Tuesday 17 May 2022

Broker tips: Homeserve, Next, Diploma

(Sharecast News) - Analysts at Berenberg lowered their target price on home repairs and improvements business Homeserve from 1,260.0p to 1,205.0p on Tuesday, stating a bid from Brookfield Asset Management's infrastructure fund appeared to be approaching.
Berenberg noted Homeserve's shares were now up 73% since their lows at the start of March, following the takeover approach from Brookfield.

While the German bank acknowledged that an official offer was yet to come through, speculation from Bloomberg indicated that the fund could reach an agreement "in the coming days" - with a $5.0bn price tag attached.

Berenberg, which reiterated its 'buy' rating on the stock, stated that with it unclear whether the $5.0bn referred to equity or enterprise value, it opted to move its price target down and also update forecasts following the Hoemserve's year-end trading update, leaving earnings per share estimates broadly unchanged.

"Like many services companies, Homeserve is a difficult business to value given the lack of comparable listed businesses, leading to volatile valuations and share prices (as witnessed over the last two years)," said the analysts.

"Using a combination of historical Homeserve multiples and a SOTP that uses peer transaction values, as well as Homeserve's stated profit targets and prudent assumptions for the 'mature' segments of the group."

Credit Suisse slashed its price target on Next to 6,450.0p from 8,025.0p on Tuesday as it argued the stock was higher risk than it looked.

Following the retailer's first-quarter results, the bank cut its FY sales growth estimate from 7% to 6.5% and its pre-tax profit estimate from £866.0m to £830.0m, versus guidance of £830.0m. It said that given better weather in March/April, Q1 sales were "marginally disappointing".

Credit Suisse, which maintained its 'neutrall' rating on the stock, noted the shares were down 19% year-to-date, making it among the best performing stocks in its coverage, despite most ecommerce peers being de-rated to record lows, its credit exposure and its core mid-market family customer being "economically challenged".

"High margins provide protection from operating de-leverage, but the low short interest also shows the extent that the market is already discounting strong execution, especially in a challenging online environment," CS said.

CS said the next catalyst is the second-quarter update in August and that the downside risk relates to UK demand and inability to pass on higher prices but did admit there was upside potential for guidance given Next's usual conservatism and favourable channel mix.

Analysts at RBC Capital Markets downgraded upgraded industrial supplies company Diploma from 'underperform' to 'sector perform' on Tuesday, stating the stock's valuation was now "less stretched".

RBC Capital said it had opted to upgrade the stock after a roughly 30% fall in Diploma's share price so far this year and an approximately 10 point fall in its price-to-earnings ratio over the last 12 months.

Whilst the Canadian bank said this was "still on the expensive side of the sector", Diploma's valuation has come down, and it now sees it as justified given the relatively defensive, high return nature of the underlying business and the strong potential for further mergers and acquisition on top.

"We have increased 22/23E by 1.5%/3% for H1 results, positive FX tailwinds, and recent M&A, although our target price reduces to 2,450.0p from 2,600.0p to reflect a 50bp increase on our discount rate," said the analysts.

"Whilst clearly not economically immune and admittedly with tough comps for the next few quarters, DPLM does operate in relatively defensive end markets, which are generally part of customers' opex budgets, and the balance sheet remains strong (year-end forecast gearing 1.4x), which provides ammunition for further M&A."

Reporting by Iain Gilbert and Michele Maatouk at Sharecast.com

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