Broker tips: Admiral, Drax, Marks and Spencer, Virgin Money

(Sharecast News) - Admiral rallied on Monday as Berenberg lifted its price target on the shares to 2,973.0p from 2,961.0p after results last week. "While the share price reaction to Admiral's FY23 results was muted on Thursday - down by circa 2% - there were plenty of reasons to be very optimistic about the outlook and we are raising estimates strongly in 2024 and 2025, up by 38% and 27% respectively," the bank said. "We believe the hesitancy of investors to keep buying Admiral is driven by a nervousness that UK motor insurance prices will fall. While this is a risk, in our view, investors did not fully appreciate how far ahead in pricing Admiral is versus the rest of the market."

It noted that Admiral beat by 19% on motor premiums in the second half and said this was all driven by pricing.

"Admiral raised prices by 37% in FY23, well ahead of the market average 25%, and this gives Admiral scope to cut prices a little, while maintaining excellent margins and growing market share."

The German bank said the level of pricing achieved by Admiral in 2023 was "outstanding" and bodes extremely well for profitability over the medium term. Berenberg also kept its rating at 'hold' on the shares but said it would be a buyer into any weakness.

Jefferies has lifted its target price for Drax from 580.0p to 600.0p and reiterated a 'buy' rating after the electricity services group's strong full-year results last month.

Despite the 15% upswing in the shares since the results on 29 February, Jefferies said it still sees 22% upside to its new target price.

"In our view, Drax management delivered an impressive presentation of strong FY23 earnings recently, combined with increased visibility on non-biomass earnings beyond 2027. This appears to be welcomed by the market," the broker said in a research note on Monday.

After adjusting its estimates post-results, Jefferies said it stands around 5% above consensus with its earnings forecasts for 2024 and 2025.

"Positive drivers of earnings include slightly higher biomass generation than previously assumed. The negatives include more normalised hydro earnings and a small reduction in biomass supply earnings forecasts," the broker said.

If the stock reached the new 600.0p target price, Drax would trade at a multiple of 3.3x on an enterprise value-to-EBITDA basis on 2024 estimates, and 5.1x earnings.

RBC Capital Markets upgraded Marks & Spencer on Monday to 'outperform' from 'sector perform' and lifted its price target on the stock to 300.0p from 285.0p as it said the share price has come in 17% from recent highs, due to investor repositioning and concerns over the UK consumer and costs outlook, but noted there "has been no great change" in its strong fundamentals.

RBC said M&S has been making good progress with its food business, helped by an improved value for money perception, while its clothing offer has benefitted from a stronger digital offer, third-party brands and a better bought range, with improvements in style, quality and value perception.

The Canadian bank said that despite the retailer's relative maturity in the UK, it sees potential for it to generate moderate growth and to have a progressive cash returns policy, which should appeal to long-term investors.

"At 10x CY24E price-to-earnings, the shares appear to be pricing no growth, but we think M&S can deliver this with a progressive cash returns policy, thus broadening its appeal to long term investors," it said.

RBC said that if M&S can show that it can generate sustainable profit growth and increase its dividend steadily over time, there is potential for it to rerate to around 12x forward earnings, which would equate to around 300p/share.

"We use the average of a DCF and sum-of-the-parts analyses to arrive at our target price of 300.0p for M&S, which supports our outperform rating," said RBC. "M&S has historically been a UK consumer proxy as it has higher than average exposure to the UK consumer; however, recently it has benefitted from self-help enabling its food and clothing businesses to outperform their markets."

Citi downgraded its stance on Virgin Money on Monday to 'neutral'/high risk from 'buy'/high risk after the shares surged on news that Nationwide Building Society had offered to buy the group in a £2.9bn deal.

Under the terms of the offer, announced on Friday, Virgin shareholders would receive 220.0p per share. This comprises 218.0p per share in cash and a 2.0p dividend to be paid in FY24.

"Following Nationwide's announcement that it is considering a 220p bid for VMUK, we move our target price to 220p," Citi said, as it noted that final confirmation from Nationwide on whether it plans to pursue a bid would be required by 4 April.

Citi, which reckons the offer is "fair", added: "The acquisition is not subject to the passing of a resolution by Nationwide's members and while we would expect the deal to be reviewed by UK Competition and Markets Authority, we think it is likely to close under the existing terms and perimeter."