Broker tips: Drax, Hikma Pharmaceuticals, Aston Martin Lagonda

(Sharecast News) - Analysts at RBC Capital Markets lowered their target price on power generation business Drax from 1,175.0p to 950.0p on Tuesday but said recent weakness in the group's share price was "misplaced". RBC updated its Drax investment case to incorporate "a conservative view" of potential windfall taxes that may be introduced by the UK government as part of the Autumn budget later this week.

"We now assume 35% additional tax on generation for just over five yrs resulting in £1.5bn additional tax for Drax. This may be an overly aggressive assumption as the government may want to positively discriminate on renewable electricity versus oil and gas, and we also don't allow for capex offsets in our estimates," said RBC.

The Canadian bank also said clarity on government interventions should allow focus to return to the longer-term investment case. RBC thinks improved clarity on cashflows should allow investors to once more focus on Drax's future growth options around BECCS, new pumped storage capacity at Cruachan, and continued expansion of its upstream pellet facilities.

"Even under our windfall tax assumptions, we see the £3.0bn capex plans as fully funded under the current balance sheet, with free cash flow yields averaging roughly 25% across the remainder of the decade. This leaves Drax approaching a cash neutral position by 2025 with debt then peaking at roughly £1.3bn (~2x EBITDA) at the end of the decade," said RBC, which reiterated its 'outperform' rating on the stock.

Credit Suisse has initiated coverage of Hikma Pharmaceuticals with an 'outperform' rating.

The Swiss bank, which set a target price of 1,700.0p for the drug maker, argued that the year-to-date underperformance had been "overdone", with headwinds in US generics "over-emphasised".

Instead, CS said its research indicated "an improving outlook for US generics", and noted it also views Hikma's positioning as "attractive" in a recessionary environment.

It continued: "Hikma trades at close to an all-time low 8 x price-earnings, and 55% discount to generic peers versus its 10-year average 16% premium."

Aston Martin was under the cosh on Tuesday after Jefferies downgraded the shares to 'underperform' from 'hold' and slashed its price target on the stock to 120.0p from 530.0p as it said that recapitalisation risks remained after the group's rights issue.

Jefferies said the majority of the change in the target price stems from higher share count post rights issue, lower discounted cash flow-based EV on reduced earnings and higher discount rate, and higher estimated YE22 net debt.

"Despite having just completed a major rights issue, AML still screens as candidate for future recapitalisation by the time the business achieves a viable operating structure, possibly 2024," Jefferies said.

The bank argued that four years into listed life, AML has yet to achieve the sustainable operating structure that would lead to a stable capital structure.

"Trading conditions have certainly been challenging but the last few years have also been supportive for luxury sports car demand," it said.

On the upside, it noted that progress on ASPs suggests the strategy pursued by Lawrence Stroll is right on the brand and product side, but AML is falling behind peers on industrial scale and still far from hitting the volume/ASP equation required to be a standalone business.

"It feels like AML investors must either be prepared to recapitalise the business again once operations reach viable metrics (positive FCF guidance for 2024) or believe that an OEM will step in and provide the scale AML is missing."