Broker tips: Intertek, Mondi, CVS Group

15th Mar 2024 16:44

(Sharecast News) - Analysts at Shore Capital downgraded Intertek from 'hold' to 'sell' on Friday following the group's recent results.

Shore Capital said the testing and assurance services specialist "likes to test our valuation thoughts", stating it "fundamentally like these activities", being "a necessary and growing element" within the global economy, underpinning quality companies' operations.

However, it stated growth rates were linked closely to GDP exposure and these services were delivered on a business-to-business basis in a competitive market, and noted that the margin ceiling was "surely determined by visible returns on capital".

"Reflecting on valuation metrics, is Intertek a growth or an income stock? FY23A results revealed a change to Intertek's payout ratio from 2.0x to 1.6x from FY24F - the resulting upgrade brings the prospective dividend up to a yield at the current share price of 3.0%. Looking to future growth, however, our forecast model on a cash flow valuation basis suggests fair value at c.£42/share (downside of 15%) - a FY24F PER of 18.0x, reflecting mid-single digit growth metrics," said Shore Cap. "With no substantive change to forecasts, but a c.20% share price outperformance to the market over the past three months, we move to sell."

Jefferies upgraded its rating on packaging firm Mondi on Friday following year-to-date underperformance.

The bank said the strategic rationale for the merger with rival DS Smith was "compelling", with "substantial" synergies and value creation.

"Consolidation is good for the industry - we upgrade standalone Mondi from hold to buy post underperformance YTD, and are buyers of both DS Smith and Mondi," it said.

However, the bank, which has a 1,650.0p target price on the stock, said it prefers DS Smith "given short-term technical pressures on Mondi".

RBC Capital Markets downgraded CVS Group on Friday to 'sector perform' from 'outperform' and slashed the price target to 1,200.0p from 2,100.0p after the UK Competition and Markets Authority said it had provisionally decided to launch a formal investigation into the vet market.

RBC said the decision "casts a pall over the industry that is unlikely to be resolved for 18-21 months".

"Based on our new scenario analysis, published today in our industry report, CVS' shares are significantly over-discounting the risk, based on our scenario analysis, but we doubt this valuation discrepancy will attract new investors until closer to a more final CMA outcome," the bank said.

RBC said the price target was cut only on the basis of a lack of news flow. It said investors may struggle to get excited about the stock until closer to the end of the investigation or, indeed, after full resolution.

"We think investors with an 18-24 month investment horizon should see the current price as a great opportunity to buy shares with almost 3x upside potential which on a worst-case basis is the upside when applying 13x to Jun-26 EBITDA," it said. "Investors focused on nearer-term performance are likely to take a view that shares will go sideways for now.

The Canadian bank stated its new price target was based on a "rather arbitrary" 50% discount to current "fair value" to account for the perception around CMA risk.