Broker tips: TT Electronics, Dunelm, Pets At Home

(Sharecast News) - Analysts at RBC Capital Markets raised their target price on TT Electronics from 115p to 160p on Thursday, saying the group had returned to a steadier footing following a strong first half and continued operational progress.

RBC also lifted its fullyear underlying earnings forecast by 9%, citing robust sales momentum, margin improvement and further selfhelp benefits. RBC said TT had delivered around 4% underlying organic growth in the first half, excluding the impact of the Plano plant closure and an EMS customer site transfer, and expects a similar rate in the second half. It also noted that orders remained supportive, with a booktobill ratio of 112% for the group and 114% in its power division.

The Canadian bank said TT's order book now covers the remainder of the year for its power and EMS units and around ten weeks for components. Notable contract wins included a multiyear agreement with RollsRoyce for power electronics across large civil aircraft engines and a strategic partnership with MBDA to strengthen European access.

Margins expanded to 8.1% in the first half, an improvement of 230 basis points, with further restructuring benefits expected to flow through in the second half. TT now sees its fullyear outlook ahead of consensus, and RBC's updated EBITA estimate of £39.4m implies only modest organic improvement, with incremental cost savings expected to support earnings.

RBC also noted that TT was evaluating a potential sale of its components business following a strategic review after the division returned to profitability in the first half, generating £1m of profit at a 2.7% margin, with order intake up 26% yearonyear. RBC said early interest in the unit was encouraging, but added that any transaction would depend on valuation, with no certainty of outcome.

Dunelm shares sparked on Thursday after Deutsche Bank upgraded the homeware retailer to 'buy' from 'hold' ahead of its strategy update.

DB reckons management will outline a revamped digital offer and increased store investment to drive accelerating earnings growth as the company progresses towards 10% market share.

The German bank, which hiked its price target on the stock to 1,050p from 850p, said profit warnings this year have raised doubts over mid-term margins and the consistency of market share gains, but said it likes the underlying business model.

Deutsche noted that cash conversion was strong at around 70% with a roughly 9% free cash flow yield in CY27. The bank lifted its FY27 pre-tax profit estimate to £219m from £210m, driven by stronger sales and stable pre-tax profit margin.

DB pointed out that the shares were down around 25% year-to-date, underperforming the FTSE 350 Retail Index by approximately 30%. "Trading at a 10.3x P/E, we think little credit is being given to the earnings upside potential from faster store openings and refits," it added.

Shore Capital initiated coverage of Pets at Home on Thursday with a 'buy' rating and 265p price target, as it said the company was "turning over a new leash".

The broker said Pets' retail division has been the problem child in recent years, with demand normalising after the pandemic pet ownership boom, accessories weak, and execution issues around range, pricing and availability compounding a softer market backdrop.

"However, the turnaround programme now appears to be gaining traction with lower prices and improved availability supporting a return to volume growth and rising customer satisfaction," it said. "We do not assume a heroic margin recovery at the firm, but even modest revenue outperformance and limited margin rebuilding should support profit growth from a depressed base."

It also noted that Pets' Vet Group division now contributes the majority of group profits and cash generation, benefits from structurally attractive demand and operates with materially higher margins than Retail.

"Growth is supported by practice maturity, increasing care plan penetration and a sizeable rollout runway, with management seeing scope for around 100 additional practices and a similar number of extensions," Shore said. "While near-term investment may temper margin progression, the JV model provides operating leverage while remaining capital light, giving us confidence in the medium-term growth opportunity; a CMA cloud has also blown over."

Shore said the market remains too focused on recent retail weakness and was underappreciating both the quality of the Vet Group profit stream and the medium-term recovery potential across the group.