Broker tips: DCC, Johnson Matthey, RWS Holdings

(Sharecast News) - RBC Capital Markets downgraded sales, marketing, and support services group DCC on Monday to 'sector perform' from 'outperform' and slashed its price target on the stock to 5,800.0p from 7,500.0p. "We are big fans of the company and management, and believe there is scope for a re-rating over time if it can skew the business away from traditional energy," RBC said.

"However, we believe the exposure to a squeezed consumer warrants some forecast caution in the current environment."

In addition, the bank said it has revisited the balance sheet and taken account of the higher average net debt position versus the year end, and additional balance sheet liabilities in its valuation, while de-ratings of comparators also impact its sum of the parts.

Analysts at Deutsche Bank raised their target price on speciality chemicals and sustainable technologies company Johnson Matthey from 2,000.0p to 2,300.0p on Monday, stating the group was in the process of starting its "cultural change" journey.

Deutsche Bank said Johnson Matthey had issued stronger-than-expected first-half results, despite underlying earnings still being down 24% year-on-year, and its full-year 2022-23 outlook implying downgrades to consensus, as the analysts highlighted that the key issue was the strategic update from the group's new chief executive.

DB said "cultural change" was clearly the focus, with cost savings, more attention on capital allocation, and better communication of the growth drivers of Johnson Matthey taking centre stage.

"While we welcome this shift in focus from management, we note that "cultural change" stories take time. This company is only at the start of this journey and is also heading into a likely softer macro environment suggesting that risks remain to consensus forecasts," said DB.

"Post these results, we have modestly lowered EPS forecasts but have increased our target price to 2300p due to updated DCF assumptions. The stock does offer deep value (at 11.2x 2022/23E P/E and 7.2x 2022/23E EV/EBITDA) but with a lack of overall visibility on the long-term growth profile of the group we keep the name at 'hold'."

Analysts at Berenberg issued RWS Holdings with a 'buy' rating on Monday, stating a recent sell-off had left a "quality value opportunity".

Berenberg noted RWS' shares had fallen by 40% year-to-date, with a combination of market-wide and company-specific factors driving "a material sell-off".

In Berenberg's view, the share price drop had left "a clear and obvious route" to a re-rating and share price recovery over the coming years, and, while it expects earnings growth to be lower in fiscal 2023 due to a combination of lower Russian translation volumes, regulatory changes in IP Services and an opex investment programme, the analyst also anticipate "a quick return" to double-digit earnings growth thereafter.

The German bank said RWS' investment programme was designed to recover organic growth to 6%+, which, alongside improving margins and the ability to deploy capital on acquisitions, supported by a growing net cash position, should allow the company to return to its long-term track record of double-digit compounding earnings growth.

"Now trading on a 10x EV/EBIT valuation and with a clear scope for upgrades (we upgrade our forecasts by 2% in this note), we see a clear path to both strong earnings growth and a significant re-rating, driving material shareholder returns," said Berenberg, which also hit the stock with a 650.0p target price.

Berenberg also highlighted Baring Private Equity's recent takeover approach, noting that while it did not result in a bid for RWS, it saw the approach as indicative of the company's "inherent value" to investors as a market-leading firm in a structurally growing sector with high operating margins and returns, a capital-light, highly cash generative business model, and a forecast net cash position.

Reporting by Michele Maatouk and Iain Gilbert at Sharecast.com