Iain Gilbert Sharecast News
08 May, 2024 15:58

Broker tips: Frontier Developments, Centrica

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CentricaSharecast graphic / Josh White

Analysts at Berenberg hiked their target price on video game business Frontier Developments from 170.0p to 300.0p on Wednesday, stating the group's strategy was "showing signs of promise".

Berenberg said its 'hold' rating on Frontier Developments was premised on low return on investment on new titles, something the group was looking to address through a strategy to focus on creative management simulation titles and better cost control.

The company's trading update on 7 May provided early signs that the strategy should pay off," said Berenberg. "While the better-than-expected net cash position removes the balance sheet risk, with the valuation at a premium to peers and the next major catalyst not until the release of the next CMS title in November, the shares are likely to lack direction, in our view."

The German bank stated that in order for it to turn more positive on the shares it must await details and data on Frontier's upcoming CMS title.

"Following the trading update, we update estimates and our price target increases to 300.0p accordingly. The shares trade on FY26 EV/sales of 1.0x and EV/EBIT of 24.4x, on our estimates, which is a premium to other UK publishers."

UBS has upgraded its rating for British Gas owner Centrica from 'neutral' to 'buy', saying that the stock carries too large a discount associated with its capital deployment plans.

UBS said in a research note that British Gas has around £1.5bn to £2.0bn in excess capital, in addition to around £0.5bn to £0.6bn per annum from 2026 for growth investments, bringing the total up to £3.5bn through to 2028.

However, at Tuesday's closing price of 131.15p, the bank estimates that the shares price in around a 50% value erosion from this uncommitted capital.

"Our view is that Centrica's stock carries a c50% discount on €3.5bn capital deployment to 2028E (options include new-build nuclear in a RAB structure) and lack of visibility on the trading businesses," UBS said. "We believe both concerns are more than reflected in the price and view the shares as cheap."

The bank has cut its earnings forecasts for the next four years by between 4% and 12% due to lower energy prices in upstream and the prediction that "switching in supply comes back".

However, due to higher cash generation in 2023 and lower decommissioning provisions, the target price on the shares has been lifted to 170.0p from 165.0p.

Centrica's stock trades at an enterprise value-to-EBITDA ratio of around 3.5 times, but warrants a multiple of closer to 5 times, UBS said.

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