Broker tips: Wise Mark's Electrical, Intertek, Babcock

(Sharecast News) - Analysts at Berenberg initiated coverage of software firm Wise with a 'buy' rating and a 1,140.0p price target on Wednesday, stating the firm was "widening the moat". Wise facilitates "fast, cheap, and convenient" cross-border payment services for consumers and businesses. Rapidly taking share in a "large, growing market", Berenberg said Wise's "superior economic model" and sharing of scale economies with customers were now "entrenching its competitive advantages".

The German bank also pointed out that ancillary income, such as the net interest income generated on customer balances, provided additional upside to consensus estimates.

Furthermore, Berenberg noted that its expensed infrastructure build-out was concealing "significantly higher underlying profitability" and/or a "meaningfully improved ability" to lower prices.

"High growth, high ROIC, cash-rich businesses that expense their investment and share economics with customers rarely look overtly cheap by point-in-time metrics; Wise trades on 30.9x FY24 EPS and 4.1% FCF yield (after expensing share-based payments)," said Berenberg. "Even at this rating, we see substantial upside, valuing Wise on a blend of target multiples and a DCF."

Analysts at Canaccord Genuity lowered their target price on online retailer Marks Electrical from 123.0p to 100.0p on Wednesday, citing short-term product margin pressure.

Canaccord Genuity, which reiterated its 'buy' rating on the stock, noted that Marks Electrical's recent trading update had outlined strong top-line growth of roughly 17.8% for Q3 and 22% year-to-date, slightly stronger than its expectations.

However, it also pointed out that despite the "strong top-line growth", gross product margins had disappointed, negatively impacted by a continued drop in consumer trading, against a strong comparative in the first half.

As a result, management now expects full-year revenues of between £115.0m-118.0m and underlying earnings between £5.0m-6.0m.

"Following today's update, we maintain revenue estimates but downgrade our FY24E and FY25E EBITDA estimates by 38% and 28%, respectively. While today's update is disappointing, we believe it reflects short-term macroeconomic headwinds that are outside of management's control, while the business continues to take market share and maintain excellent customer service and cost discipline," said Canaccord.

RBC Capital Markets upgraded Intertek to 'outperform' from 'sector perform' and hiked its price target to 4,700.0p from 3,900.0p, making the stock its preferred pick in the testing, inspection, and certification space.

"We think a combination of credible medium-term revenue growth and margin expansion targets, relatively conservative FY24 consensus assumptions, plus the potential for Intertek to deploy surplus capital in a disciplined manner sets up Intertek for outperformance versus the wider sector this year," the bank said.

RBC noted that over the medium term, Intertek targets a return to a 17.5% peak margin and beyond, which consensus assumes does not happen before FY28, raising the possibility of upside surprise sooner.

"The management team is focused on best-in-class benchmarking, pricing initiatives, and any M&A is likely to focus on higher growth, high margin sectors in our view," it said. "So although the margin ambition is not strictly organic, it highlights Intertek's desire to keep driving EBITA growth ahead of revenue growth."

In the shorter term, RBC sees the annualisation benefits of the 2022/23 cost reduction plan and the easing of comps in the higher margin consumer products activities underpinning the consensus assumption for around 30 basis points of group margin expansion.

Numis upgraded Babcock to 'buy' from 'hold' and hiked its price target for the stock to 530.0p from 325.0p, citing "a brighter outlook, healthy order intake, achievable targets and still relatively undemanding valuation".

Numis pointed out that Babcock now derives around 70% of its revenue from its core defence market, up from around 55% in FY21, reflecting the disposal of several non-core assets in other markets during the last three years.

It said there has been a more marked skew of the contract backlog towards defence and noted a marked increase in commercial momentum within the defence space over the last 12-18 months, particularly in terms of new partnerships signed with defence sector peers.

"Whilst budget challenges remain prevalent, the wider backdrop of increased defence spending by western nations should offer a supportive backdrop to Babcock from a top-line perspective," Numis said.

It also pointed to an improved operating performance, saying that recent periods have seen a steady improvement in operating margin and free cash flow, with debt and leverage both reducing markedly over the last two years.

"We would expect further reductions in debt and leverage over time driven by positive FCF, and further margin uplift aided by the reduction in low-zero margin programme revenue over the next few years," Numis said.