Broker tips: JD Sports, Quilter, Diageo

12th Aug 2024 15:13

(Sharecast News) - Deutsche Bank downgraded its recommendation for shares of JD Sports from 'hold' to 'sell' due to what it saw as the inevitable cost of growing the business and trimmed their target price of 115.0p.

In its judgement, the company's profit and loss suggested a margin for just low single-digit growth in operating expenditures when one took into account depreciation and amortisation expenses as well as provision releases.

Yet space growth and cost inflation were pegged to grow at rates in the mid-single digits, resulting in a roughly 350 basis point gap between depreciation and amortisations on the one hand and capex on the other.

"This is evident in deteriorating cash conversion, and as it inevitably closes with time, will present a headwind to margins," they said in a research note sent to clients.

DB also anticipate flat like-for-like sales growth across the 2025 fiscal year, against company guidance for 1-4% growth.

"Whilst the shares appear cheap vs history and relative to peers on a PE basis, a peer average Cal-25 7.5% FCF yield drives our 110.0p TP."

Analysts at Berenberg hiked their target price on wealth management firm Quilter from 105.0p to 135.0p on Monday after H1 profits came in ahead of consensus estimates.

Berenberg said Quilter's H124 results came in ahead of consensus-adjusted pre-tax profit expectations, primarily driven by lower-than-expected operating expenses. It also expects Quilter to continue to generate "solid levels" of flows, with the platform business in particular performing well.

However, Berenberg also said it was still awaiting clarity on the outcome of an ongoing advice evidence review, and to determine if and what level of customer remediation may be required, leading it to reiterate its 'hold' rating on the stock.

"We update our forecasts with a circa 4% upgrade to FY24 EPS, driven primarily by lower operating expenses and higher average AuMA, partially offset by a lower average revenue margin," said the German bank.

RBC Capital Markets upgraded Diageo on Monday to 'sector perform' from 'underperform' and lifted the price target to 2,400.0p from 2,100.0p.

"The 'affordable luxury' investment case is threadbare," RBC said. "With a new CFO and IR joining imminently, Diageo has the opportunity to reset expectations based on a future as a conventional staples business."

The Canadian bank noted that this should involve kitchen-sinking revenue and profit guidance, a pre-requisite of repairing investor confidence.

RBC added that in share price terms, this could be more than offset by moderating both fixed and working capital investment.