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26 Mar 2021 | 15:08

Broker tips: Ocado, Next, IQE

(Sharecast News) - Berenberg downgraded Ocado shares to 'hold' from 'buy' on Friday and cut the price target to 2,390.0p from 2,925.0p as it said the grocer was a great company but noted that expectations were high. "We believe that Ocado's ecosystem of grocery e-commerce solutions is best-in-class, that it will continue to sign more deals with both existing and new partners, and that it is one of the stand-out long-term winners in the UK consumer and technology space," Berenberg said.

However, the German bank noted that Ocado's value had moved a long way in the past 18 months, up around 80% since it upgraded the shares to 'buy' in 2019.

"We are cognisant of the high expectations now built into the name, and with travel restrictions delaying new partnerships over the near term, this may drag on sentiment," the bank said. "Furthermore, the shares may be sensitive to the normalisation of grocery demand post-Covid-19, thereby making debate for the rest of 2021 less one-sided to the upside," said the analysts.

As a result, Berenberg said the risk/reward was currently less attractive than for other names in its UK consumer coverage.

RBC Capital Markets upgraded Next shares to 'outperform' from 'sector perform' on Friday, hiking the price target to 8,800.0p from 8,100.0p as it said the retailer should continue to benefit from its strong online and credit offer.

The bank also sees an opportunity for Next to take further share in the heavily-disrupted UK mid-market, by leveraging its logistics, range and customer loyalty advantages

"Cash returns should be back on the cards from next year and valuation looks reasonable given its potential for strong online growth and cash returns," RBC said, hence the upgrade.

It said Next has among the most defensive and balanced exposure in the sector, given its high weighting to online related activities, which generated around 56% of sales and 63% of profit prior to the pandemic. Next also has higher than average exposure to UK retail parks, and to homewares sales, which make up around 20% of the total.

"Having deleveraged its credit offer in 2019 due to the pandemic, we see an opportunity for it to convert recently acquired cash customers to credit this year and to take further share due a more price competitive offer," RBC said.

Analysts at Canaccord Genuity lowered their rating on semiconductors outfit IQE from 'speculative buy' to 'hold' on Friday, citing what it called a "gross margin conundrum".

Canaccord said on Friday that ahead of IQE's 2020 full-year results it was bracing itself for some growth moderation on the back of difficult 2020 comparatives, up 28% year-on-year, and pointed to a 7-8% currency headwind. However, the analysts said yesterday's guidance for broadly flat constant currency sales and underlying earnings in the first half implied reported sales were down mid-single digits, marking the first downgrade to its expectations since last year's upgrade cycle.

The Canadian bank highlighted that despite record sales in 2020, IQE delivered only a modest 3% adjusted operating margin, which it pinned on the firm's relatively low gross margin of around 19%, compared to peer margins ranging between 25% and 50%, making the muted leverage "a bit of a conundrum".

While Canaccord said IQE remains "structurally well placed" to benefit from two technology mega-trends - growing adoption of 5G as well as 3D sensing in smartphones.

However, for the mid-term, Canaccord's expectation of a combination of muted growth, lack of upside risk to sales and earnings per share forecasts, as well as continued low profitability and free cash generation, made it move to the sidelines and lower its target price on the stock to 65.0p from 80.0p.
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