Broker tips: Volution, Videndum

1st May 2024 15:42

(Sharecast News) - Jefferies reiterated its 'buy' rating and 510.0p target price on Volution on Wednesday as it said the company's ability to drive margins higher, through both revenue mix and efficiency, is more than offsetting the challenging market backdrop to deliver ongoing earning upgrades.

"As the macro environment improves, and regulations tighten further, we see scope for the group to deliver organic revenue growth towards the top end of its 3%-5% target range," Jefferies said. "With leverage at the lowest level since FY15, ongoing M&A can compound attractive earnings per share growth."

The bank said it continues to be impressed by Volution's operational performance and the recent 1H24 results showed that robust organic revenue growth - driven by UK Residential - has been supplemented by further EBITA margin gains.

"We believe these margins, in excess of the more than 20% target, will endure aided by improved supply chains allowing for a more efficient manufacturing process and greater regulation driving the market towards more sophisticated, higher-margin solutions," said Jefferies. "Indeed, it is these same dynamics on the regulatory front that make us confident that as the challenging macro subsides under a lower interest rate environment, Volution can push its organic revenue growth back towards the top end of its target range."

Jefferies also said that M&A remains a near-term catalyst.

"With Net Debt:EBITDA at its lowest level since FY15, we expect to see further activity in this area, and believe that up to £100m could be spent without exceeding a 1.5x Net Debt:EBITDA level. Such a level of spend would provide 7% EPS accretion, by our estimates."

Analysts at Berenberg lowered their target price on hardware and software manufacturer Videndum from 500.0p to 450.0p on Wednesday following the release of the group's full-year results on 23 April.

Berenberg said Videndum's FY23 results reflected an "annus horribilis" for the group, significantly affected by the US writers and actors' strikes, a "challenging" macroeconomic environment and ongoing de-stocking. Revenue from continuing operations was 31% lower year-on-year at £307.0m, with adjusted operating profits down 81% at £12.8m.

The German bank added that in response to pressure placed on the group's balance sheet, Videndum raised £118.0m of net proceeds via an equity issuance in November, and ended the year on 3.3x net debt/EBITDA leverage.

Berenberg noted that with the strikes ending in November, this, plus easing de-stocking into an improving macroeconomic environment, should underscore an "attractive recovery trade". However, this was yet to materialise and management flags uncertainty about the shape and pace of a second-half recovery.

"Taking a conservative view on trading from here, we push our EBIT forecasts to the right by one year, resulting in a 30% downgrade to FY24 EBIT," said Berenberg.

"While disappointing, into FY25 Videndum now trades on 8.7x P/E. For a market leader, into a market which undoubtedly will recover given structural demand trends, we think on balance the thesis remains attractive."