Broker tips: Babcock, Lancashire, B&M European Retail

(Sharecast News) - Bank of America Merrill Lynch reiterated its 'buy' rating on Babcock International on Thursday while trimming its price target on the stock. BofA said the London-listed defence contractor had reported "solid" first-half numbers earlier this week and noted that its interim results had de-risked the 2024 full-year guidance.

"To us, the focus shifts to [February's] capital markets day, in which we expect to learn more about the mid-term margin trajectory, growth levers and capital allocation," said the analysts. "We decrease our 2024-26 full-year estimated operating profit [...] due to lower revenue drop through in nuclear, and weaker-than-expected outlook in aviation."

BofA said its price target now goes to 565.0p, up from 585.0p, but maintained there the stock had an still attractive valuation, margin expansion, and capital allocation optionality.

Bank of America also expects Babcock to increase dividends progressively and was forecasting around 13.0p per share by the 2026 full year.

Analysts at RBC Capital Markets hiked their target price on insurance firm Lancashire Holdings from 800.0p to 825.0p on Thursday following the group's recent capital markets day event.

RBC Capital said that heading into the capital markets day event it had viewed Lancashiire's balance sheet as being "very prudently managed", and stated incremental details on the day were supportive of its view.

The Canadian bank noted that earnings resiliency continued to improve from Lancashire's diversification strategy and said its current capitalisation gave it "plenty of flexibility" to grow further into an attractive marketplace while leaving upside on further capital returns.

RBC, which reiterated its 'outperform' rating on the stock, said Lancashire's valuation "remains cheap" in its view at 1.3x book against an average 2023-25 return on equity of 22% with double-digit yields.

"We make no changes to our net income forecasts while our EPS increases by 2% reflecting the announced $50.0m buyback. For 2023e, we continue to forecast a final dividend per share of $0.15 to be announced giving a full-year total DPS of $0.70. For 2024e and 2025e, we forecast total DPS of $0.90 (up from $0.75) and $1.20 (unchanged), respectively, or a yield of 10.5% and 13.9% in each year. We assume no further buybacks," concluded the analysts.

JP Morgan has reiterated an 'underweight' rating and 550.0p target price for discount retailer B&M European Retail after an "unexciting" set of first-half results last week.

The company reported on 9 November that group revenues totalled £2.55bn in the six months to 23 September, up 10.4% on last year, while adjusted underlying earnings were up 16.1% at £269m, with margins rising by 50 basis points to 10.5%.

JP Morgan said the profit figure was about 5% below forecasts, driven by weaker-than-expected results in the UK on the back of higher operating expenditure.

However, B&M lifted its adjusted EBITDA guidance to £620m-630m, "materially higher" than last year's £573m, the company said.

"Whilst we believe B&M might be able to deliver on its upgraded FY24 outlook via higher gross margins, we think its update failed to excite investors, particularly relative to some other UK general retailers and grocers," JP Morgan analyst Borja Olcese said.