Broker tips: London Stock Exchange, Chemring, Playtech
Berenberg has reiterated its ‘buy’ rating on the London Stock Exchange, arguing that listed exchanges are fairly valued, despite concerns to the contrary.
The bank conceded that shares of listed exchanges looked expensive. "It is understandable for investors to be concerned by the sector’s valuation," it said.
"The average global exchange currently trades on a x22.2 next year’s earnings for growth of 8%. All four exchanges under our coverage currently trade more than one standard deviation above their average valuation over the last decade."
But the bank's analysts also argued that the macro backdrop was "historically benign", with US interest rates at a cycle peak and European authorities set to relax monetary policy, while previous business models had changed.
"The average share price beta of the exchanges under our coverage has fallen by 60% since 2009,” they said. “This more than offsets the increase in equity risk premia. Along with the decline in interest rates, we estimate that the cost of equity has fallen 41% for the average exchange under our coverage."
The note continued: "Recent market trends have been driven by economic and political factors – trade disputes in particular – that do not directly affect exchanges and, potentially, have depressed the sector's beta.
"Even if the sector's market sensitivity returns to historical norms, however, we estimate that current valuations are only discounting average long-term earnings growth of 2.3%. This does not appear demanding given the structure of the industry and long-term trends in global growth."
Berenberg reiterated its ‘buy’ ratings on the LSE also upped its price target on the stock to 6,340p from 5,670p.
Elsewhere at Berenberg, analysts downgraded "fairly valued" aerospace and defence firm Chemring from 'buy' to 'hold' on Wednesday following a solid run by the stock over the last quarter.
With Chemring having been the best performing stock in the pan-European aerospace and defence sector over the last three months, up 26% versus the sector average of just 4%, Berenberg noted that its shares now trade on 14.3x 2020 consensus earnings, in line with the company's two-year average and a roughly 10% premium to the rest of the sector.
The German bank said Chemring's rally had been driven by the continued execution of new management's improvement strategy, as well as the ongoing phased restart of its UK countermeasures unit following an explosion at the site last August.
"We believe this reflects the company's fundamentals and, therefore, view the shares as fairly valued," said Berenberg.
Berenberg, which did increase its price target on Chemring from 180p to 190p, also increased its EPS estimates for Cheering by 5% in 2019 and 2% in both 2020 and 2021, due to lower-than-expected interest expenses, and made only "minor housekeeping changes" to its revenue and operating profit assumptions.
"We continue to view Chemring as an improving equity story, with a new management team delivering a medium-to-long-term improvement strategy," concluded the analysts.
Analysts at JP Morgan initiated coverage of Playtech at 'overweight', highlighting the recent stabilisation in the company's business-to-business arm, with its activities outside of Asia having turned higher, and its recent acquisition of Snaitech.
The investment bank labelled the purchase of Snaitech "transformational" and said it would open up a new avenue for growth in the business-to-consumer space.
And over the medium-term, the analysts saw an upside to margins in both the B2B and B2C units, further telling clients that they expected the 2019 financial year to mark the trough for the company's growth, margins and cash flows.
"Beyond FY19E, we expect broad-based growth across B2B and B2C. The overall business has de-risked, in our view, making the current valuation compelling."
JP Morgan set an initial target price for Playtech shares of 603p.