Broker tips: Spectris, B&M European, Tesco, Kingfisher

(Sharecast News) - Analysts at Berenberg raised their target price on instrumentation company Spectris from 3,470.0p to 3,780.0p on Monday, stating the group's upgraded outlook provided "near-term visibility". Berenberg said Spectris' full-year results on 23 February included "an impressive beat to consensus forecasts" and highlighted a "significantly better outlook" than it had been expecting.

The German bank highlighted that Spectris now has "strong visibility" on both growth and gross margin recovery in the first half of 2023 and said it expect to see a further "very strong period" for earnings growth.

However, while Berenberg pointed out that the near-term outlook, combined with "a clear medium-term growth and quality improvement story", suggest a "highly attractive investment case", it also opted to continue to "stress caution" about Spectis' more cyclical end-market exposure.

"We still expect a macro slowdown to ultimately affect Spectris, and that slowing order growth (versus progressively tougher comps) and a recovery in overheads will result in a more challenging outlook for H2. In turn, we believe that this limits upside to the share price over the next 12 months," said Berenberg, which reiterated its 'hold' rating on the stock but raised its earnings per share forecasts by 10%.

RBC Capital Markets upgraded B&M European Value Retail to 'outperform' from 'sector perform' on Monday and hiked its price target to 550.0p from 460.0p, citing an undemanding valuation versus peers, among other things.

"B&M is still trading at a discount to domestic and particularly international peers, yet should offer amongst the highest, most durable growth in the sector, driven by positive LFLs and space expansion," RBC said.

B&M trades at 13.5x CY23E price-to-earnings and offers a dividend yield of around 4%, RBC noted.

"In our view, it remains cash generative, and we expect it to continue to look to return surplus cashflow to shareholders. We see potential for B&M to achieve a gradual re-rating as it delivers consistently positive LFL sales growth (as higher rated Dollar General has done in the US) and as the growth of France and Heron Foods become better appreciated by the market."

The bank said it was raising its FY24-25 pre-tax profit forecasts by 4-7% due to its expectation of higher, price-driven LFL sales growth, along with a gradual ramp-up in UK space growth.

Jefferies has upgraded Tesco and Kingfisher as part of a wider review of its UK retailer ratings.

Tesco, the UK's largest supermarket by market share, and B&Q-owner Kingfisher have both been upgraded to 'buy' from 'hold', with target prices of 310.0p and 330.0p, respectively.

On Tesco, it said: "We are approaching the anniversary of the downtrade inflection in UK grocery. Mix pressures in the market should start reducing a little, and Tesco's focus on assortment optimisation should help optimise in-store mix dynamics.

"Reducing margin pressures in the second half 2022/23 should provide investors with improving confidence on free cash delivery."

As far as Kingfisher goes, Jefferies said that despite weakness in the UK housing market, the European DIY retailer - which also owns Screwfix, Castorama and Brico Depot - had "the greatest valuation/forecast upside to current inputs".