Broker tips: IAG, Rolls Royce, Dr.Martens

(Sharecast News) - Peel Hunt analysts described International Consolidated Airlines Group's latest full-year figures as "positive all around" but stuck to their 'hold' recommendation on the shares and 135.0p target price. The results were "slightly" ahead of their estimates (and consensus), net debt was lower and 2023 guidance was to be "at least" in line with the analyst consensus, they explained.

They also considered the overnight announcement of its purchase of Air Europa as "positive", adding that they expected the shares to move higher.

"If approved by the regulators, Air Europa will generate strategic benefits, allowing the group to turn Madrid into a hub with the connectivity and market share similar to other major hubs," they said.

Furthermore, the outlook for 2023 was also "positive" given that capacity was expected to recover to 98% of its 2019 levels, against the 95% that they had penciled in.

Analysts at J.P.Morgan raised their target price for shares of Rolls Royce but kept their recommendation at 'underweight', telling clients that the engineer's raised forecasts for earnings per share and free cash flow were "somewhat low quality".

They also termed the new chief executive officer's turnaround plans for the engineer as "risky".

On the positive side of things, they upwardly revised their EPS estimates for 2023-25 by 84%, 34% and 29%, respectively. So too, their estimates for Rolls' free cash flow over the same time frame were raised by £200-250m for each of those years.

Negatively, their estimate of the company's adjusted net debt increased by £500m per year.

The analysts also highlighted the scant commentary from management around Rolls' low market share in the market for Trent 1000 engines and the high risks around the LTSA business model.

Regarding Tufan Erginbilgic's turnaround plans "so the proof will be in the delivery, not the statement of intent", they said.

"It seems that Mr Erginbilgic aims to de-lever RR's balance sheet organically; we believe this is a risky strategy and leaves RR highly vulnerable to any unexpected shocks in the next few years."

J.P.Morgan raised its target price for the shares from 70.0p to 90.0p to reflect its higher estimates, but that implied a roughly 30% downside risk.

Numis initiated coverage of Dr Martens on Friday with an 'add' rating and 180p target price, which it said offers 17% total shareholder return.

Numis noted the shares are down 65% since the IPO in January 21, and 20% year-to-date against a backdrop of the retail sector rallying.

"Slowing revenue growth, a spike in inventory cover and warehouse execution issues have driven two downgrades (Nov 22 and Jan 23) and shaken confidence," it said, adding that mid-term IPO guidance now feels unachievable.

Numis said its estimates are materially below FY24 consensus - revenue 5% below, EBITDA 20% below - driven by its expectations for another downgrade at FY23 results in May.

"However, this is a business built on fundamentals we value in the sector and we see an opportunity to revisit the investment case as the business goes through a reset for next stage of growth.

"Supported by peer analysis, we get comfortable current challenges are short term in nature and believe the medium term global opportunity remains attractive."

Numis said its 180p target price implies a price-to-earnings of 14.5x cal-24, at a discount to relevant peers trading on 17x.

"Once visibility on near term earnings and resolution of operational issues improves we see potential for further upside driven by rerating in line with peers, implying share price of 255p on our conservative outer year margin forecast or 435p if FY22 peak level margins can be restored," it said.