Broker tips: John Wood, Fevertree, Avast

Analysts at Berenberg raised their target on oil field services group John Wood from 230p to 300p on Monday, stating the company had managed to protect margins throughout the coronavirus-fuelled downturn.

Berenberg noted Wood had reacted to the downturn by cutting costs, which it said should leave margins "resilient" despite the lower level of activity.

In the first half of the year, revenues at John Wood were down 11% year-on-year when adjusting for divestments, and Berenberg now forecasts for revenues to drop 9% for the 2020 fiscal year as a whole.

However, underlying earnings margins only fell 70 basis points, which Berenberg said it viewed "positively", demonstrating the ability of the group to protect margins.

The German bank did warn that revenue slippage was a risk for the tail end of the year given the current environment but looking to 2021 and beyond, it said the "outlook appears brighter" - underpinned by structurally rising activity in chemicals, renewables and the built environment, along with a cyclical recovery in oil

Berenberg also highlighted that the business was gradually pivoting away from conventional oil, gas and renewables and said its move to the built environment offered "growing alternative sources of revenue".

"While there are limited near-term catalysts, if execution and cash flow generation can remain solid, we think there is further upside, and increase our price target to 300p," said the analysts, which also reiterated their 'buy' rating on the group.

RBC Capital Markets upgraded its rating on shares of posh tonics maker Fevertree to ‘outperform’ from ‘sector perform’ and hiked the price target to 2,500p from 1,100p as it said its confidence in the US is "restored” and the company’s Covid-19 momentum looks sustainable.

RBC said the US is definitely performing better than it had expected, stating that after stripping out moving parts such as the on-trade shutdown, consumer stockpiling and price cuts, there had been a substantial multi-month improvement in the underlying business.

"We've sense-checked this - household penetration, repurchase rates and social media brand 'buzz' are also growing," it said. "This is even more impressive when you account for the fact that 30% of the marketing opportunity disappeared back in March and distribution gains have been slowing."

RBC said growth rates will normalise from current levels as lockdown eases, price cuts come in and Fevertree cycles last year's distribution gain. However, the bank’s confidence in the US story has been restored.

It estimated the US gross margin is 100 basis points below group level. That said, the adverse mix impact of US growth will be offset by the operating leverage it can drive thanks to half of Fevertree’s operating costs being fixed.

"After reinvesting in its international regions, we estimate 10bps of margin growth for Fevertree going forward," it said. "Our reduced margin forecasts are more than offset by uplifted sales expectations."

Goldman Sachs initiated coverage of cybersecurity specialist Avast with a ‘buy’ recommendation on Monday, helping push the stock higher during early trading.

The bank said the consumer-facing software firm was set to benefit from increasing work from home trends "in a heightened cyber risk environment".

"With a geographically diversified user based of 435m+, we believe the market under-appreciates Avast’s opportunity for earnings growth, further augmented by upselling/cross-selling product adjacencies, such as privacy and Internet of Things, which we expect to drive a 7% revenue compound annual growth rate and a 10% free cash flow CAGR for Avast.

"We, therefore, see an attractive opportunity ahead of the first-half results on 12 August, and in listed the stock at ‘buy’ with a 12-month price target of 600p, offering 21% upside."

Avast, which debuted on the London market two years ago, joined the FTSE 100 earlier this month. Last year it reported full-year earnings before interest and tax of $460m on revenues of $873m. Goldman Sachs is forecasting 2020 revenues of $897m and EBIT of $473m.