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(Sharecast News) - Shore Capital downgraded On The Beach on Tuesday to 'buy' from 'hold' as it cited execution risks around new ventures.
It said that as OTB seeks to diversify its offering and navigate the late-booking cycle, there has been downward pressure on revenue margins.
"With further moves into new offerings, including the announcement of cruises this month, we reduce our near- and medium-term profit assumptions," the broker said. "This raises the question 'can OTB hit its previously set targets?'"
Shore said it was cutting its top-of-the-range FY26F pre-tax profit forecast from 44.5m to 41.7m, driven by its revenue margin of TTV assumption being revised down from circa 11% to 10%.
"We continue to believe that the group will retain a well-funded balance sheet and note the dividend yield of circa 2%," it said. "Our FY27F figures remain well below management's medium-term ambitions, and we look to review our near/medium-term forecasts alongside the FY25A results on 2 December."
Along with its downgrades and cautious stance on the growth strategy, Shore also noted an ongoing difficult trading backdrop.
"Whilst travel is typically a more robust area, consumer discretionary spending remains weak. Asda's income tracker highlights pressures on lower quintiles, whilst the likes of Barclaycard Consumer have seen downward trends over the past year," it said.
"As such, we also take this opportunity to reduce our recommendation from buy to hold, given execution risk around new ventures and the potential for further disappointment on the current financial run rate versus management targets."
The broker cut its fair value from 330p to 230p, based on a 5.5x EBITDA multiple, which is broadly in line with the 6x basket of peers average, using FY26 forecasts.
Deutsche Bank nudged up its price target on B&Q and Castorama owner Kingfisher following a stronger-than-expected first half, with better seasonal sales in the first quarter and a robust improvement in core sales over the period.
"At the time, it felt like the guidance for PBT to be at the 'upper end' of the 480-540m range was slightly conservative and management had held some of the earnings beat 'in reserve' in case trading conditions deteriorated," DB said.
"We suspect this has happened at the end of 3Q."
The bank said datapoints are mixed but it sees group LFL at -0.5% compared to consensus +0.2%, with the main differences being a weaker France.
"There is increasingly a question of whether France matters to the investment case at this stage but we do not see an earnings upgrade with the 3Q results next week," it said.
Deutsche also said that trading on a circa 11.5x Cal26E price-to-earnings, the multiple has recovered from its lows and investor sentiment is more positive on the name.
"We see a risk of disappointment into the print, although given our circa 2-3% EPS upgrade post 1H, we increase our price target (based on an 11x FY27E P/E) to 285p from 280p."
Deutsche Bank maintained its 'hold' rating on the shares.