Broker tips: JD Sports, 4imprint, Hilton Foods, BAE Systems

JD Sports Fashion was sitting pretty at the top of the FTSE 100 on Friday as Berenberg said it was its "top pick" in consumer discretionary.

The bank, which reiterated its ‘buy’ rating and 1,100p price target on the stock, said the retailer demonstrated a "remarkable" recovery last year, significantly outperforming sports retail and brand peers, further demonstrating the strength and resilience of its brand and proposition.

"However, despite being perceived as a ‘lockdown winner’, it has not traded like one and with the shares remaining flat versus pre-pandemic levels, it has not traded like a ‘vaccine winner’ either," Berenberg said.

The bank said its indicators and peer read-across suggest consumer demand has accelerated further in 2021. In the US, which makes up about 35% of sales, it expects government stimulus to provide another big boost to spending. In the UK, which accounts for around 40% of sales, it expects strong pent-up demand on reopening.

It noted that these are the two markets where the vaccination programmes are most advanced. JD is hugely underestimated as a reopening trade and there is significant upside risk to consensus forecasts from pent-up demand and attractive M&A optionality, Berenberg said.

"JD looks cheap, in our view, for its quality and growth, offering a faster-growing and more diversified alternative to owning the sports brands, at a 40% discount."

Analysts at Berenberg also lowered their target price on media outfit 4imprint from 2,500.0p to 2,300.0p on Friday, stating it was no longer sure whether being patient would pay off for investors.

While Berenberg acknowledged the age-old adage of "good things come to those that wait", the analysts stated that in the case of 4imprint, it very much so felt that the notion was being tested.

The German bank pointed out that 4imprint had delivered a 93% drop in pre-tax profits in 2020, with consensus now expecting a full recovery by late 2022.

While Berenberg said it remains more than 10% below consensus in outer years, even if consensus figures can be achieved, the analysts stated 4imprint's valuation looked "very stretched" and did not appear to be pricing in many of the risk factors in the group's recovery.

"While we do not deny that the company is a good business and has a good long-term opportunity, we are unsure of whether the 'wait is worth the reward', at least in the near term," said Berenberg, which reduced its estimates by 10-20% over coming years and reiterated its 'hold' rating on the stock.

RBC Capital Markets upgraded Hilton Food to ‘outperform’ from ‘sector perform’ on Friday, hiking the price target to 1,500p from 1,200p as it said the stock’s valuation looks compelling.

"It's relatively undervalued on an EV/IC versus return on invested capital basis and our new £15 price target implies 30% upside," the bank said.

"At the same, the outlook has improved: a material step back in capex will drive higher returns on capital, and revenues from substantial investments in Australasia and Europe are to start flowing through."

RBC added that Hilton Food is a good inflation hedge.

BAE Systems faces further outflows if the trend towards responsible investing continues, Exane BNP Paribas said as the broker cut its rating on BAE to 'neutral' and reduced its share price target by 15% to 525p.

European funds are moving rapidly to satisfy ESG (environmental, social and governance) requirements imposed by investors and the defence sector has been penalised because of a lack of agreement on compliance, Exane said. Many asset managers are dumping companies rather than risk having to justify a potentially controversial investment, it added.

Aerospace and defence companies could face a further derating if their shares were to be treated like tobacco companies. The sector looks cheap but a rebound may not happen unless companies take back control of their stories, Exane said.

BAE needs to take action on important controversies for its value to materialise and could be snubbed by more investors if ESG gains further momentum, Exane said. Among other contentious actions, BAE has sold billions of dollars of arms to Saudi Arabia that campaigners say have been used against civilians in Yemen.

"Corporates and investors need to take control of the defence exclusion debate," Exane analyst Chloe Lemarie said in a note to clients. She said investors should "transform their exclusion strategy into a lobbying tool that can have an actual ESG impact".