Broker tips: Next, Page Group, IAG

10th Jul 2024 15:04

(Sharecast News) - Citi has upgraded Next from 'sell' to 'neutral' and hiked its target price by 40% on the back of an improving macro environment in the UK and the retailer's cash position.

"We believe Next is well placed to benefit from a more positive UK consumer environment, with real wages now positive for three quarters and improving consumer confidence," Citi said in a research note on Wednesday.

The bank estimates that Next will generate around £2bn in surplus cash over the next five years, with further equity investment providing up to 10% upside to earnings per share forecasts for the fiscal year ending July 2025.

Citi has lifted its target price for the stock from 6,500p to 9,120p, based on the shares trading at 13 times forward earnings per share (EPS).

The target price "assum[es] a +5% uplift to our EPS from assuming c.50% of Next's surplus cash is used for equity investments (with a 25% ROCE), and the remainder used for buybacks", it said.

PageGroup's profit warning this week wasn't enough to deter RBC Capital Markets from changing its 'outperform' rating on the stock, saying it expects a "sharp recovery in earnings".

Nevertheless, the broker cut its target price for the shares from 540.0p to 510.0p after lowering its profit forecasts for the next two years on the back of Tuesday's second-quarter trading update from the recruitment firm.

PageGroup said gross profit fell 12% versus the same period a year earlier to £224m, and weaker-than-expected trading in June, along with tough macro conditions, mean it was scaling its full-year operating profit guidance back to £60.0m, down from £118.8m last year and below estimates of £90.0m.

RBC said its downward revisions to forecasts reflect around 7% lower expected net fees for the next two years, however, they come at a " very high drop through to the EBITA level as PAGE continues to invest in the group strategy by broadly maintaining its platform of experienced fee earners".

RBC also highlighted that its new target price still represents "attractive upside potential on a total shareholder return basis".

"We think PAGE's seasoned management team are making the right call to preserve consultant capacity, creating the pre-conditions for a sharp recovery in earnings when client and candidate confidence improves."

Morgan Stanley double-upgraded IAG on Wednesday to 'overweight' from 'underweight' and lifted its price target on the stock to €2.80 per share from €2.10.

The bank said that following its prior concerns, capacity growth now looked increasingly supportive to pricing in both the near and medium term.

"IAG's cheap valuation is not the exception within sector, but the path to earnings upgrades looks clearest," it said.

MS also said that supportive fare data was showing up in advertised fares in North Atlantic, while advertised data across the rest of the total network was also outperforming.