Broker tips: Softcat, Close Brothers, GSK

5th Jul 2024 15:16

(Sharecast News) - Analysts at Jefferies downgraded IT infrastructure provider Softcat to 'underperform' on Friday, citing "incremental caution" around the IT services sector.

Jefferies thinks FY24 consensus estimates for Softcat look "reasonable" but noted that FY25-26 consensus of 12-13% underlying earnings growth was already ahead of the company's typical framework to target low double-digit gross profit growth and high single-digit EBIT growth.

"We think this puts downward pressure on consensus," said Jefferies.

The investment bank also noted that Softcat trades on one of the highest valuations in European tech, with valuations that were more consistent with roughly 20-25% EBIT growth.

"Given the forecast risk, this premium valuation looks exposed," said Jefferies. "We align DCF assumptions with the same metrics used at Bytes, leading us to downgrade our price target to 1,490.0p and move our rating to 'underperform'."

Deutsche Bank initiated coverage of Close Brothers on Friday with a 'buy' rating and 610.0p price target as it said the overhang on the shares has opened "considerable value".

"We expect the outcome of the FCA motor finance review to be manageable; capital to remain within range; ROTEs to trend higher; and the discount to eventually unwind," it said. "At 0.5 x TBV Close Brothers is worth the risk."

DB noted that the shares year-to-date have been driven by the FCA review. It said the shares have overly discounted this risk.

"It we take the PPI ruling as precedent and factor in differential risk across the motor finance lending portfolio the impact could be negligible," said the German bank.

Deutsche Bank factors in £150.0m conduct charge, which it said was manageable without too much additional adjustment to the financial outlook.

Citi has reiterated its 'buy' rating on GSK despite a flurry of disappointing news for the biopharma giant in recent weeks.

Shares took a tumble last week after a ruling by a US health agency narrowed usage recommendations for all respiratory syncytial virus vaccines, restricting the addressable market for GSK's Arexvy product.

Citi said the decision "delivered a blow" to Arexy, as it removed its own revaccination assumptions (previously assumed at 5-10%) and its reduced peak sales estimate to £2.2bn (previously £2.9bn).

Meanwhile, ongoing litigation concerns related to formed heartburn drug Zantac continue to weigh on the stock, as the company continues to work through tens of thousands of personal injury claims.

"We had previously argued GSK had set itself up to beat and raise through 2024, based on the vaccine/oncology launches and HIV/respiratory dynamics, which now seems less likely," said analysts. "Although the £7.0bn market cap loss on rising Zantac litigation concerns feels harsh (our price target assumes a £2.4bn settlement), the resulting sentiment overhang will weigh on the shares."

However, Citi said it remains optimistic on the stock over the long term but still opted to cut its price target to 1,900.0p from 2,120.0p.