Broker tips: Pearson, Beazley, Synthomer, Renishaw
Pearson rallied on Monday after UBS upgraded its rating on shares of the education publisher to ‘buy’ from ‘neutral’ and lifted the price target to 650.0p from 545.0p as it becomes more positive on US higher education.
UBS said there was more upside than downside risk to FY21 consensus forecasts; the disposal of non-core assets followed by a buyback and cost-out could be more than 20% earnings accretive; Pearson can build profitable businesses in US Higher Education, enabling 7% FY21-25 estimated group EBIT compound annual growth rate.
The bank said Pearson was attractive, offering earnings growth, an 8% estimate FY22 free cash flow yield and M&A optionality.
"There is upside risk to our FY21E forecasts if we see a recovery in school text book sales," it said.
The bank said US higher education is a "material opportunity" for Pearson.
UBS said the question investors ask most is whether Pearson can deliver profitable growth in US higher education, in both Courseware and Online Program Management and the bank's analysis suggests the answer is yes.
Morgan Stanley downgraded its stance on insurer Beazley to 'equalweight' from 'overweight' and cut the price target to 350.0p from 550.0p as it said the company’s limited financial flexibility will leave the cost of equity at elevated levels and limit the upside.
MS said that despite the capital raise in the first half of the year, Beazley's growth prospects are constrained by limited capital and financial flexibility.
"Our detailed analysis suggests that the company could see challenges in delivering the levels of growth that we envisaged in our previous forecasts," it said. The bank cuts its 2022 net income estimate to $369.0m from $393.0m and versus consensus of $352.0m for a return on equity of 17.5%, down from a previous estimate of 16.8% and compared to consensus of 16%.
MS said it expects Beazley to fully utilise the remaining $225.0m letter of credit to meet its reduced growth assumptions and at the same time, pay a flat dividend in 2021 and 2022.
"We remain cautious as Beazley's limited financial flexibility offers modest loss absorption capacity and exposes our base case to greater risk," it said. “As a result, we expect the cost of equity to remain high and therefore increase our cost of equity assumption to 12% (previously 9.5%)."
However, the bank said its bull case shows that, hypothetically, a second capital raise could support higher growth and capital returns.
JPMorgan Cazenove upgraded its stance on Synthomer on Monday to 'overweight' from 'neutral' and hiked the price target to 450.0p from 242.0p as it highlighted the company’s exposure to the gloves market and potential benefit from the Covid-19 pandemic.
It noted that Synthomer sells nitrile latex for nitrile gloves and that this business made up around 20% of the company's earnings in 2019, "hence the earnings tailwind from the Covid-19 are well known".
"However, we believe that both the magnitude and the duration of this upside is likely to be better than the market assumes."
JPM said there is a potential of further significant upside as it has significantly discounted the potential tailwind that it calculates from the substantial step-up seen in nitrile prices/spreads due to tight supply.
"As Covid-19 vaccines become widely available, the gloves demand will moderate but this might ... not happen till 2H21/2022," the bank said. In addition, it is possible that the greater focus on hygiene might result in structurally higher gloves demand in the future.
Analysts at Berenberg raised their target price on engineering company Renishaw from 5,700.0p to 6,200.0p on Monday, stating the firm appeared to be "poised for a recovery".
Berenberg stated that it had been one month since its "contrarian buy" initiation on Renishaw and, so far, the analysts said their investment thesis was playing out "exactly as expected".
The German bank highlighted that Renishaw's first-quarter update was "bang in line" with forecasts, with Japanese machine tool orders also continuing to show "gradual progress".
However, Berenberg acknowledged that it had received a number of investor pushbacks on its thesis, several of which had been amplified by the stock's recent 20% share price rally.
Berenberg added that it does not believe Renishaw's headline multiples "tell the full story" and think investors should consider a sum-of-the-parts methodology.
"Despite the strong run, we continue to think the outlook is attractive, with huge upside potential if certain scenarios play out," said the analysts.