Broker tips: EMIS Group, ITM Power, Paragon Banking

Analysts at Canaccord Genuity downgraded healthcare software provider EMIS Group from 'buy' to 'hold' on Monday after the company became the latest M&A target in the UK mid-market technology sector late last week.

On Friday afternoon, Optum UK announced the acquisition of EMIS for £1.2bn - a 49% premium to its closing price on Thursday. The analysts hiked their target price on the stock from 1,560.0p to 1,925.0p in order to match the per-share value of the deal.

Canaccord Genuity highlighted that the deal will see EMIS fold into Optum UK, a subsidiary of UnitedHealth Group and long-term provider of software to the NHS, as well as both a customer and partner to EMIS.

While the Canadian bank did not identify any "material overlap" between the core software offerings, it believes Optum's data analytics capabilities offer a "complementary proposition" to the EMIS-X analytics suite, with the combined offering proposed to deliver greater access to integrated analytics for clinicians across the NHS. The deal was also expected to enable EMIS to accelerate development, backed by the resources of the enlarged group.

"The all-cash offer is a 49% premium to the undisturbed share price and 23% above our prior target price and is recommended by the board. It values EMIS at a FY22E P/E of 31x, EV/EBITDA of 18.5x (versus pre-take out multiples of ~21x and ~11x, respectively) and 6.8x EV/Sales (vs 4.3x). All metrics are above valuations of other recent industry deals. We therefore change our recommendation to 'hold' and raise our target to reflect the 1,925p/share cash offer," said Canaccord.

Analysts at Berenberg lowered their target price on energy storage and clean fuel company ITM Power from 225.0p to 185.0p on Monday, stating risks to both consensus expectations and the stock’s rating remained "skewed to the downside".

Berenberg pointed out that while ITM Power's share price may have halved since its downgrade to 'sell' in September, it remains convinced that further risks remain for the stock.

The German bank said delivering on full-year 2023 consensus expectations will be straightforward – with many of ITM's scale-up challenges coming to the fore in the 2022 financial year.

Berenberg stated that while ITM still trades at an April 2023 enterprise value/sales ratio of 24x, falling to 12.7x for April 2024, this compares to Nel, McPhy, and Plug Power at 9.1x, 4.5x, and 4.1x for December 2023, respectively.

"With our longer-term concerns also still unanswered, we retain our 'sell' rating, with our new 185.0p price target valuing the business at £1.1bn," said Berenberg.

Analysts at RBC Capital Markets raised their target price on specialist finance provider Paragon Banking Group from 560.0p to 600.0p on Monday following the firm's first-half results.

RBC Capital Markets said its full-year adjusted pre-tax profits estimates for Paragon increased by 4%, driven largely by higher net interest income from higher-than-expected rates and lower-than-expected deposit betas, partially offset by higher costs and cost of risk.

The Canadian bank also stated that on a divisional basis, the increase in its full-year pre-tax profit estimates was driven by Paragon's mortgages and commercial divisions.

"Our model now reflects PAG's upgraded NIM guidance for FY22 (NIM expansion in FY22 greater than 20bps, RBCe: +23bps). We also include higher lending volumes in FY22 following upgraded company guidance (RBCe loan growth of 8% 22/21). Our FY23E reported RoTE of 15.0% compares to PAG's guidance of medium-term RoTE above 15%," said the analysts.

RBC also reiterated its 'sector perform' rating on Paragon.

Reporting by Iain Gilbert at Sharecast.com