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21 Jan 2021 | 15:00

Broker tips: Ashtead, Cairn Energy, Hiscox, Sainsburys

(Sharecast News) - Deutsche Bank upgraded its stance on equipment rental firm Ashtead to 'buy' from 'hold' on Thursday and hiked the price target to 4,100p from 3,000p, based on "growth opportunity and lower cyclicality", as it said the Specialty business was a game changer.

The bank said that while Ashtead is a well-run company and has a significant growth path ahead, it has been 'hold' rated until now given the inherent cyclicality of the business, overlaid with macro concerns in non-residential; the capital intensity of the business, and with that the increasing burden of replacement capex cohorts from the early to mid-years of the last decade.

"As for the macro backdrop, while the non-residential data remains soft, we would expect a normalisation in activity assuming an effective vaccine roll-out this year," it said.

"However, this remains hard to predict, is fairly obvious to investors and likely priced in. In our opinion, the main differentiator compared to the Ashtead of old is the impact of the Specialty business."

DB also noted that in the past quarter, the Specialty business delivered 18% growth compared to a 6% drop in General Tool and Specialty, and now accounts for around 25% of revenues.

Analysts at Canaccord Genuity slightly lowered their target price on Cairn Energy from 220.0p to 210.0p on Thursday, citing challenges resulting from "a greater imperative for a transaction" in a higher oil price environment.

Canaccord highlighted that Cairn had "benefitted significantly" from two recent news stories - the completion of the Senegal assets sale in December and its recent success in an Indian arbitration case.

The Canadian bank said the Senegalese sale had "considerably bolstered" the group's balance sheet whilst also eliminating "still onerous development capital requirements related to the developments" and allowing Cairn to announce a special dividend of 32.0p per share to be paid on 25 January.

Cairn's win in India, securing it a $1.2bn award plus costs and interest, may be "more challenging to convert to cash in the short term", said Canaccord, but the analysts stated the game-changing potential was "obvious".

Canaccord stated it believes the next phase for the company, inorganic growth, was now likely to provide "the most significant market catalyst".

"We expect continued FCF generation in the coming years to result in ongoing balance sheet strength that should provide the company with opportunities for further shareholder distributions as well as inorganic growth," said the analysts, who kept their 'hold' rating on the stock.

Jefferies has downgraded Hiscox to 'hold' in the wake of the Supreme Court judgement on business interruption claims.

The bank said it had already added in an additional $88.0m to the net losses expected in 2020, following last week's judgement, as well as cutting 2021 and 2022 forecasts by 10% and 3% respectively.

But in a note published on Thursday, it argued: "Although our model adjustments related to 2020 and 2021, we find that it is the 2022 and 2023 forecasts that our forecasts most differ to consensus. In particular, we were surprised by the speed of margin expansion that consensus anticipates.

As a result, the bank said it find that its forecasts 19.4% below consensus in 2022 and 18.1% below in 2023, indicating that its hopes that the earnings downgrade cycle was over may have been "wishful thinking".

Jefferies, which previously had a 'buy' rating on the specialist insurer, also reduced its target price to 1,000.0p from 1,020.0p.

Berenberg upgraded Sainsbury's shares to 'hold' as the bank advised investors to concentrate on consumer companies with fundamental strengths rather than short-term earnings.

The start of 2021 and perhaps beyond will be heavily affected by Covid-19 lockdowns making 2021 earnings largely meaningless for many UK consumer groups, Berenberg said.

Berenberg analyst Owen Shirley and colleagues said for companies hit hard by lockdowns they would concentrate on financial strength and revenue run rates as restrictions are withdrawn.

Shirley upgraded Sainsbury's from 'sell' and raised his price target for the supermarket group to 214.0p from 183.0p based on reduced "headwinds" from Sainsbury's banking business and discretionary retail exposure through Argos.

"Our style remains focused on 'quality'. In other words, we concentrate on businesses with strong 'moats', high returns, good margins and the potential to become much larger in time," Shirley wrote in a note to clients.
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