Broker tips: Strix Group, Pearson, Next

(Sharecast News) - Analysts at Canaccord Genuity lowered their target price on kettle safety controls manufacturer Strix Group from 375.0p to 300.0p on Thursday as it pondered whether near-term headwinds would "bark or bite". Canaccord Genuity stated that while Strix's full-year results were in line with its expectations, the firm's outlook flagged geopolitical uncertainty and ongoing headwinds from an inflationary environment.

Although the Canadian bank acknowledged that measures were in place to increase prices in the second quarter of the year, it said Strix's £7.0m of indirect revenue exposure to the Commonwealth of Independent States, with £3.0m of those sales being attributable to Russia, were a concern given the current conflict in the region and resulting sanctions. It also noted risks stemming from potential Covid-19 lockdowns in China.

"With demand visibility understandably low the question is whether these headwinds will bark or bite. We prudently trim our FY22E-23E adj. EPS estimates by 2.2% and 3.2%, respectively, to reflect the uncertainty," said Canaccord, which stood by its 'buy' rating on the stock.

Barclays reinstated coverage of Pearson on Thursday with an 'equalweight' rating and 725.0p price target, after US investment manager Apollo said it would not be making an offer for the educational publisher after failing to agree to terms.

"The Pearson story has been significantly complicated by the macro backdrop and by the bid from Apollo (now withdrawn)," said Barclays.

"We had based our prior 'underweight' on the view that Pearson required exceptional execution to turn the business around and drive the growth and margins that they expect by 2025 while hope in the market was pretty high."

Barclays said that despite an uncertain macro situation, it thinks the company is well placed to at least approach its profit guidance for 2022, "and that has scarcity value now".

The bank also said that education is a defensive revenue stream, Pearson has minimal exposure to Russia, modest exposure to inflation, and a buyback will run through 2022.

It noted Apollo's third offer of 870.0p a share for Pearson and said the debate on whether it is too expensive on 4% free cash flow yield and 18x price-to-earnings in 2023E "looks a little specific against this backdrop".

Analysts at Deutsche Bank slashed their target price on retailer Next from 9,250.0p to 7,850.0p on Thursday, stating investors need to "think differently" about the stock.

Deutsche Bank noted that Next has increasingly been talking about the medium-term and this should make investors take notice.

The German bank said for many years Next operated its business "very effectively" on a "marginal gains" philosophy, with many small steps being taken to manage the business and evolve to external market conditions.

"In our view, the change started with the Total Platform where Next realised its investments and expertise could be monetised with other brands beyond the brand aggregator model," said the analysts.

Deutsche Bank said the medium-term outlook for Next was important, as the required investment in technology and logistics will be larger and the income stream derived over a longer period.

"It may not happen overnight but investors need to think differently about Next and the increased visibility on its earnings stream," said Deutsche.

However, Deutsche Bank still thinks that Next offers larger growth prospects and is more defensive than it has been given credit for, leading it to stand by its 'buy' rating on the stock.