Broker tips: Entain, Flutter, SThree, Sainsbury's

(Sharecast News) - Barclays downgraded Entain on Tuesday to 'equalweight' from 'overweight' and cut the price target to 1,070p from 1,120p, as it said "the recovery is not straightforward". "For the stock to work we think it needs Online to return to market growth rates or better and US share to stabilise (and grow)," Barclays said, adding that "neither are a given".

The bank said there is little free cash flow and high leverage restricts M&A.

"A new CEO could address the balance sheet," it said.

"The stock appears cheap but risk-reward is fairly balanced here so we downgrade to EW."

Jefferies has named Flutter Entertainment as its top UK pick in the European gaming sector and said it remains positive on the whole European gaming sector for four key reasons.

"1) Online channel growth and increased online penetration provide insulation from macro trends; 2) regulatory headwinds should ease; 3) the US profitability ramp now begins; 4) M&A remains dynamic - recent deals highlight a valuation disconnect to public markets, especially in Europe," Jefferies said.

As for Flutter, the broker its recent move to a US primary listing has created a "short-term catalyst path" with the company's "continued market dominance despite an increasingly competitive backdrop." It has a 19,500p target price for the UK-listed shares, which implies 18% upside on current levels.

"Consequent comparison with US-listed, high growth, digital peers shows a material valuation disconnect: 16.6x EV/EBITDA versus 18% compound EBITDA growth contrasts with peers on materially higher multiples."

Berenberg initiated coverage of recruiter SThree on Tuesday with a 'buy' rating and 550p price target, which offers around 30% upside.

"The group's STEM expertise exposes it to clear drivers of long-term growth, while its weighting towards contract placements offers an attractive earnings and cash profile, with capital allocation optionality to enhance organic returns," it said.

The bank said SThree's footprint covers 82% of the global STEM market, where a skills shortage has been exacerbated by accelerated investment in digitalisation and healthcare, and decarbonisation.

"This structural undersupply of STEM talent acts as a compelling long-term growth driver. We expect STEM employment placements and associated recruitment fees to significantly outstrip non-STEM market growth, supporting our 3.3% net fee compound annual growth rate for FY 2024-FY 2026," it said.

It also argued that a quality operating model puts SThree on a par with professional service peers.

"SThree's contract-focused operating model differentiates it favourably and markedly from a basket of generalist staffers," Berenberg said. "A contract order book offers earnings resilience and visibility, while the group's structurally higher margins, net-cash balance sheet, and consistency of free cash flow conversion places it alongside an evolved peer group of consultant-led, quality UK professional service companies."

Berenberg pointed out that despite a quality operating model offering high-teens margins, mid- to high-single-digit organic operating profit growth, and a circa 30% return on capital employed on a strong balance sheet, the valuation does not reflect this, at just 9.5x FY 2025 price-to-earnings.

HSBC upgraded Sainsbury's to 'buy' from 'hold' on Tuesday and lifted the price target to 310p from 300p as it took a look at European food retail.

The bank noted that Sainsbury's has been gaining top line momentum, having disinflated prices ahead of the market.

It said the launch of the Nectar loyalty programme was a success, and combined with Sainsbury's relative competitive advantage in scale versus the other Big 4 retailers, Asda and Morrison, it should allow Sainsbury to continue to drive above market growth.

At the retailer's capital markets day on Wednesday, HSBC expects productivity measures to be a key area of focus.

"We also expect the group to focus on building on its Food first strategy outlined three years ago, with an increased focus on innovation and a growing share of own-label, as well as refreshing its outlook for Argos and General Merchandise including clothing against the backdrop of an anticipated, cyclical recovery in non-food consumption trend," it said. "The announcement of a share buyback would be the cherry on the cake, but is not required to support our upgrade to buy given the pull back of the shares on the absence of a Q3 profit upgrade, a function of slower peak discretionary sales/tough comps."