Broker tips: Intertek, GSK, HIkma Pharmaceuticals

(Sharecast News) - Analysts at Berenberg hiked their target price on quality assurance business Intertek from 5,400.0p to 5,500.0p on Tuesday, citing faster-than-expected margin accretion. Berenberg stated that despite a strong first-quarter update, Intertek's stock price movement was "surprisingly muted" on the day.

"Our belief is that despite bullish looking numbers in consensus, consensus numbers do not match sentiment among much of the buy-side, and (according to our feedback) much of the sell-side," said Berenberg. "We pull forward our estimate of when Intertek will be able to meet its 17.5% mid-term margin guidance to 2026 from 2027, and believe there is upside risk to that estimate."

The German bank adjusted FY24 margin phasing, with accretion occurring in the second half of the year for Intertek. It expects FX headwinds to ease into the second half, and estimate an underlying margin of 16.8% for the year - a 40 basis point improvement on FY23).

"Our working assumption is that the company can generate 50bp of underlying margin improvement on an annual basis, excluding FX, and so we think there is upside risk to our estimates in the longer term."

Berenberg added that Intertek trades on an FY24 price-to-earnings ratio of 20.5x, versus its implied P/E of 22.9x.

Volatile moves in GSK's share price will likely persist in the near term as a result of ongoing Zantac-related litigation, according to Shore Capital, but the stock's long-term investment case was "still appealing".

GSK announced on Tuesday it has started the process of appealing a recent decision by the Delaware Superior Court regarding the ongoing Zantac, or ranitidine, litigation. In its statement, GSK emphasised the scientific consensus that there is no consistent or reliable evidence linking ranitidine to an increased risk of cancer, referencing 16 epidemiological studies involving over one million patients, which support this conclusion.

Shore Capital said that while GSK's stock was likely to be dampened temporarily as the market awaits further clarity around the size and scope of potential damages, the Zantac litigation has "disproportionately weighed on the share since the demerger of Haleon [in the summer of 2022] and overshadowed the improving growth outlook we believe GSK has been delivering".

Analysts at ShoreCap, who have a 'buy' rating and 2,200p target price on the stock, calculate that the market initially priced in settlements of at least $200,000 per GSK claimant when the litigation issue first arose in August 2022. However, sector peers Sanofi and Pfizer are understood to have recently paid out just $25,000 per claimant in US cases.

"We still view the current discount to peers as unwarranted and largely attributable to misguided assumptions around the potential cost of Zantac litigation," Shore Capital said. "We still believe that a worst case, up to c.$30bn downside scenario for litigation has been priced into the share and believe there remains a compelling risk-reward profile on offer."

Citi lifted its price target on Hikma Pharmaceuticals on Tuesday to 2,845.0p from 2,770.0p as it said IQVIA April data highlighted "healthy trends" for injectables and US Generics.

"The strategy at US Generics (30/20% of sales/EBIT) longer-term remains reducing volatility and delivering a sustainable EBIT of $100-120m, as a result of efforts to increase contract manufacturing activities and further broadening the Specialty portfolio," it said. "More importantly, we argue investors should focus on long-standing efforts to improve the product mix at Branded (24/22% 2024e sales/EBIT) finally paying dividends, resulting in a sustainable step-up in profitability.

Citi also noted that injectables continues to offer high single-digit growth prospects at attractive margins, with greenfield efforts to develop a US compounding business expected to break even in 2025.

The bank assumes $350.0m sales and a 35% underlying earnings margin in 2035, noting that it was moving to the top-end of guidance on stronger profitability in Hikma's branded/injectables business.