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Broker tips: Coca-Cola HBC, Drax Group, Aveva

Fri 13 May 2022 14:58 | A A A

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No news or research item is a personal recommendation to deal. Hargreaves Lansdown may not share ShareCast's (powered by Digital Look) views.

(Sharecast News) - Jefferies upgraded Coca-Cola HBC to 'buy' from 'hold' on Friday and lifted its price target on the stock to 2,000.0p from 1,800.0p as it said although there was still no visibility on the endgame for the Russia/Ukraine conflict, it has more confidence in the underlying earnings prospects of the business.

The bank noted that with Russia and Ukraine accounting for around 20% of profits, CCH had been hit hardest within European beverages, down 31% since the invasion.

"If we remove Russia/Ukraine and assume that the underlying business can grow mid-single digit, we believe the shares are trading on calendar 2023 price-to-earnings 13.8x versus 5-year average multiple 19.3x," said Jefferies.

"On our £20 price target this implies shares are on 16.8x. As guidance is reinstated, consensus will firm up, investor confidence should build and the shares should re-rate."

CCH said on Thursday that it was evaluating all options for its Russian operations and would have a smaller presence in the country after US drinks company Coca-Cola suspended operations in response to the invasion of Ukraine.

Credit Suisse has downgraded Drax Group to 'underperform', on expectations that the power generator could face windfall taxes.

CS said Drax has benefited from the recent surge in gas prices, leading it to increase its estimates for earnings before interest, tax, depreciation, and amortisation by 11%, 31%, and 27% for 2022, 2023, and 2024, respectively. It also increased its target price on the stock from 600.0p to 650.0p.

However, the downgrade to 'underperform' from 'neutral' comes as expectations that gas prices will start to ease and concerns that the generator may face windfall taxes.

CS said: "Drax has performed well on the back of extremely high natural gas prices following the Russian invasion of Ukraine.

"Our [downgrade] is predicted on our forecast that the current 216.0p/therm NBP gas price for 2022 recedes to 70.0p/therm by 2024, or else Drax surrenders some of the benefit through windfall taxes."

Analysts at Berenberg cut their target price on software firm Aveva from 3,550.0p to 2,800.0p on Friday but said they remained positive on the group's transition story.

Berenberg, which also reiterated its 'buy' rating on the stock, said during its fourth-quarter trading update, Aveva provided full-year 2023 guidance that was "materially below" consensus expectations.

"In our view, the disparity between the circa 3% FY23 top-line growth implied in the guidance and the 8.5% consensus figure is largely due to the fact that the company's business-model transition is likely to happen sooner than expected - we estimate that the transition will reduce FY23 growth by as much as 3.5ppt," said Berenberg.

The German bank said it had updated its estimates based on expectations for an acceleration in the pace of Aveva's model transition, resulting in lower revenue and profit margin estimates over the forecast period.

However, in its view, a successful model transition could make Aveva a more "resilient" and "profitable" business, with improved revenue visibility and a recurring revenue base, while the subscription delivery model could attract up to 50% value uplift.

"Previously, we valued Aveva on a 2.7% one-year forward FCF yield," said the analysts. However, Aveva will experience volatility in its near-term financials as it undergoes a business model transition and, as such, we now value Aveva on its FY26 FCF instead. We value AVEVA on a 2.8% FCF yield on FY26 FCF. We discount it to present day and apply a 25% discount (transition execution risk), and lower our price target to 2,800.0p"

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