Broker tips: Renewi, Drax, Vodafone

(Sharecast News) - Analysts at Peel Hunt reiterated their 'buy' recommendation for shares of Renewi on Tuesday following the company's pre-close trading update, noting that net debt had continued to reduce. In particular, Peel Hunt noted how the waste management outfit was successfully passing on cost inflation without any meaningful increase in customer churn.

Other positives cited included slight growth in its Netherlands Commercial division, progress towards certification and soil stockpile reduction at its ATM unit, and a better-than-expected performance at its specialities division.

Peel Hunted pointed out that on pre-IFRS 16 terms, net debt was seen ending the year at €370.0m or 1.9x estimates for the company's underlying earnings. It had been anticipating net debt of €438.0m but also pointed out that much of that difference was the result of deferred capital expenditures.

"With growth investments on track, we maintain our 'buy' rating and target price of 920.0p, targeting a circa 6.0x FY23E enterprise value/EBITDA ratio," It concluded

Analysts at Liberum lowered their target price on power generation business Drax from 952.0p to 940.0p on Tuesday but stated its bioenergy with carbon capture and storage (BECCS) proposition remained "strong".

Liberum said although power BECCS was not included in its immediate track one process, the UK government has confirmed that it will set out a process for the expansion of track one and has launched track two. Importantly, BECCS will now be eligible for both.

The government has also confirmed that it will work closely with electricity generators currently using biomass to facilitate a transition to power BECCS, noted Liberum.

"On this basis, we believe there remains a lot to play for with regards to Drax's UK BECCS proposition, especially when considering its considerable importance to the government's target of removing 5Mtpa of CO2 by 2030," said the analysts. "Power BECCs remains critical to UK government's net zero targets. The case for US BECCS remains strong, and will likely see an even greater focus for Drax."

Liberum, which reiterated its 'buy' rating on the stock, stated its valuation indicated that Drax trades on a full-year 2023 enterprise value/underlying earnings ratio of just 2.9x despite renewed visibility on earnings to 2027 and clarity on UK fiscal policy.

Citi resumed coverage of Vodafone on Tuesday after a period of restriction, hitting the stock with a 'neutral' rating.

The bank said it sees "significant" fundamental upside if the company executes well and/or in a breakup scenario.

"But there are additional risks that may weigh on profitability in the coming quarters and with FY23 results due in May, we expect another reset to expectations," Citi said.

"After that, there are potential options that could materialise, though we note that most are outside of Vodafone's control and thus will only be attractive to investors if earnings risk is out of the way (at least temporarily)."