Broker tips: Softcat, Capital, Admiral, Diploma

(Sharecast News) - JP Morgan has downgraded its rating on Softcat from 'neutral' to 'underweight', stating the IT infrastructure and services provider's slow earnings growth doesn't justify the stock's premium valuation. The bank has slashed its target price for the shares from 1,400.0p to just 1,150.0p, well below Tuesday morning's price of 1,260.0p.

"We revisit Softcat's equity story following our summer initiation and reviewing recent industry data points. We downgrade Softcat to 'underweight' as we see a more challenging outlook vs. peers not yet fully captured in its premium valuation," said analyst Joseph George. "From here we see downside risk to consensus earnings," he said.

Following the company's annual results last month, George said that JP Morgan's negative view was a result of four main factors: expected margin dilution due to fast headcount expansion and ongoing investments; demanding consensus forecasts after gross sales missed expectations in the second half; Softcat's overexposure to the UK with an over-reliance on small business customers in a tough economic environment; and consensus estimates not fully reflecting profits being weighted to the second half of the new financial year.

JPMorgan Cazenove also upgraded Intermediate Capital Group to 'overweight' from 'neutral' on Tuesday and lifted its price target on the stock to 1,882.0p from 1,738.0p as it said it was well positioned for earnings growth.

The bank said ICG surprised it positively last week, delivering a better-than-expected deployment in its private debt funds as well as better-than-expected net investment returns on its balance sheet portfolio.

"In addition, ICG has several new strategies on the pipeline, which we have now incorporated in our fund-by-fund detailed model," it said.

JPM said that even though the shares are around 20% higher than when it initially relaunched its recommendation in March, it believes the still low price-to-earnings multiple, as well as earnings upgrades - mainly due to better net investment returns but also higher expected FMC earnings - leave more room for outperformance.

JPM lifted its pre-tax profit estimates by 36% in FY24E, 7% in FY25E, 15% in FY26E and 23% in FY27E.

Citi upgraded Admiral on Tuesday to 'buy' from 'sell' as it said its 'Deep Dive' report had suggested consensus was too conservative on the impacts of recent pricing on top-line estimates and the implications of the Ogden discount rate changes in 2024.

"We are now buy-rated on the UK motor sub-sector as pricing and Ogden tailwinds put us circa 17% ahead of Admiral FY24E consensus earnings per share whilst we are circa 7% ahead of Direct Line's FY25E consensus OPBT due to continued motor margin recover to a NIM of 11%," it said.

Citi said its own motor claims inflation index points to material improvements since 1H23 as it sees claims inflation at only 5.5% in October following material decelerations in damage-related repair costs and improvements in repair cycle times.

"This points to a much better starting point for claims inflation in 2024E compared to +12.7% we estimated in December 2022 and is ultimately positive for 2024 margins," Citi said, as it hiked its price target on Admiral to 2,941.0p from 2,057.0p.

Analysts at Berenberg hiked their target price on technical products and services supplier Diploma from 3,500.0p to 3,800.0p on Tuesday, stating the firm's recent full-year results offered "much to be enthused about".

Berenberg said Diploma's FY23 results showcased "a stellar performance" in the face of weaker peer reporting throughout Q3 and "a weak macroeconomic backdrop", demonstrating the power of the group's decentralised, increasingly diversified model.

While the German bank admitted that the shares "reacted positively" on the day, management commentary on expectations into next year - as well as a strong balance sheet and active £1.0bn pipeline of M&A opportunities - had kept it "enthused" on the story.

"We make slight upgrades to our forecasts (c2% FY24 EPS), move our price target to 3,800.0p, and reiterate our 'buy' rating," said Berenberg.

Reporting by Iain Gilbert at Sharecast.com