Broker tips: CLS Holdings, Direct Line, Hays, Flutter Entertainment
Analysts at Berenberg took a fresh look at the UK real estate sector on Tuesday as the London workforce works from home once again following the implementation of Britain's "Plan-B" Covid-19 restrictions.
Berenberg analysed the likely impact of hybrid working patterns, prevailing market conditions and the growing importance of both flexibility and sustainability for the subsector as we enter 2022 and concluded that, despite the recent relative underperformance of the subsector, its safe-haven status and depressed valuation multiple, it expects market sentiment to "remain a headwind" throughout the first half of 2022.
The German bank believes that total returns for developer-traders will remain "significantly" below both their ten-year averages and its cost of equity assumptions in the medium-term.
Berenberg stated that with market conditions expected to remain "benign", active asset manager CLS Holdings remained its "top pick" in the subsector due to its "superior income returns", its potential to deliver one-off capital gains, its lean central cost base, its sector-leading track record of outperformance, its German exposure and its 30% relative valuation discount. Berenberg also raised its target price on the stock to 330.0p from 300.0p.
Deutsche Bank upgraded Direct Line to 'buy' from 'hold' on Tuesday, citing increased confidence in the group's potential to sustainably grow the top line.
The bank, which left its target price on the stock unchanged at 340.0p, said the share price suggests continued market caution over new regulatory pricing rules. But, despite this, it sees three positive long-term and medium-term catalysts for the group.
First off, it said DLG's motor insurance pricing discipline in 2021 should help it attract higher volumes if there is a wider market pricing recovery during 2022, as DB expects.
Secondly, the German bank thinks the transformation programme could improve the bottom-line to the extent where management can then choose to target top-line growth whilst holding margins steady at 93%, and, finally, added that the transformation programme should also allow the group to secure reinsurance partnerships, which in turn could help to narrow some of the valuation gap with rival Admiral.
Although DB recognises that pricing volatility may persist in the short term, it reckons the shares look attractive on a 10% all-in 2023e yield (based on normal dividends plus sustainable buy-backs).
Recruiter Hays rallied on Tuesday as Credit Suisse upgraded the shares to 'outperform' from 'underperform' and lifted the price target on the stock to 210.0p from 155.0p, arguing that labour scarcity supports margin accretive growth.
The bank lifted its FY22 earnings per share estimates by 4% and its FY23 and FY24 estimates by 13%-17%. CS said growth should be supported by talent shortages driving both greater usage of agencies to engage hard-to-find candidates and wage inflation which feeds directly into margin accretive gross profit growth.
The bank said Hays' market-leading positions in Germany, Australia and the UK, plus other smaller markets, extremely strong balance sheet, investment into growth initiatives, exposure to IT recruitment, developed contracting operations, and long-running focus on leveraging technology leave it "well placed to flourish in candidate scarce and evolving labour markets".
Citi upped its rating on Paddy Power owner Flutter Entertainment on Tuesday to 'buy' from 'sell' as it said it was "increasingly bullish on the size of the US prize".
In a research note on European gaming, the bank said it forecasts a long-term EBITDA opportunity of $9.3bn, which was double what it expected at the same time last year.
"The revenue generated in states that are open is more than we had predicted, a greater number of states have launched/proposed regulation for online sports betting than we had forecast, and we expect a US EBITDA margin of 30% medium-term," it said.
"Further, we expect Flutter and Entain's dominance to continue, while Evolution’s product quality will drive its strong US positioning."
As a result, it said the value it ascribes to the US has increased 40%/24%/45% for Entain/Evolution/Flutter, with the US now 38% of the value in its target price for Entain, 20% for Evolution and 50% for Flutter.