Broker tips: Darktrace, Halfords, Asos
Cybersecurity firm Darktrace tumbled on Friday after Bank of America Merrill Lynch initiated coverage of the stock with an ‘underperform’ rating and a "street-low" price target of 240p, which implies 18% downside potential.
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Software & Computer Services
BofA noted that the company primarily operates in the Network Detection & Response cybersecurity market but has been adding some capabilities in the Extended D&R (XDR) space.
"While revenue growth has been strong historically (48% in FY22) driven partly by its attractive interface, successful marketing and a highly effective salesforce, we expect growth to significantly decelerate (BofAe 18% compound annual growth rate of FY23-25e versus 23% cons) as: 1/ we expect much stronger competition in the next 12 months, 2/ weaker macro puts pressure on new wins as customers further consolidate providers, 3/ upsell potential remains unproven with limited success to date," it said.
The bank explained that in a weak macro environment, customers are often likely to buy additional solutions from existing providers rather than from new ones.
"This puts significant pressure on Darktrace as it relies primarily on new wins," it said.
Halfords was under the cosh after RBC Capital Markets downgraded the shares to ‘sector perform’ from ‘outperform’ and cut the price target to 220p from 230p.
"We think that Halfords remains a strong player in a space that has seen a number of challenges across the last few years," RBC said.
"We believe that near-term, it should benefit from market recovery and digital/data driven gains, but we believe execution risks remain."
RBC said the valuation now looks fair after a recent re-rating in the shares, hence the downgrade.
"We have also lowered our FY24-25e earnings per share forecasts by circa 3% given slightly lower margin expectations due to softer cycling sales and labour cost pressures."
Liberum upgraded Asos on Friday to ‘hold’ from ‘sell’, but cut the price target to 470p from 500p, as the risk of an equity raise has now materialised.
The broker said that Asos’ £80m equity raise and £275m new debt facility - replacing the existing £350m revolving credit facility - may well help to improve flexibility with an extended duration (April 2026) and easier covenants but comes at the cost of 20% dilution and an 11% interest rate.
“An expensive refinancing for no additional liquidity and funding,” it said.
“While we remain wary of the new strategy, the risk of an equity raise has now materialised, and we therefore move to hold (from sell).
Liberum noted that the shares are trading on 0.2x EV/sales and 4x EV/EBITDA and said successful execution of the strategy could offer material upside but execution risk remains high.
"There still remains a worst-case scenario that further financing may be needed to replace the £500m convertibles in 2026. We therefore need more proof points before we turn positive."