Broker tips: Ashtead, Kainos, Future

(Sharecast News) - JPMorgan Cazenove reiterated its 'overweight' rating on Ashtead on Tuesday and hiked its price target to 6,800p from 5,600p as it argued the risk/reward is now attractive. The bank said that the equipment rentals firm is currently a key debate stock in the sector, with the age old "cyclical or structural" debate reignited and likely to be tested over the coming 12 months.

It said the profit warning in November has not helped calm fears despite being driven by multiple independent non-cycle related factors.

"However, our work in this note shows that a combination of structural changes and management actions has driven an evolution in the business model and created a more sustainable equity investment with still sector-plus growth rates, robust cash generation and strong balance sheet optionality meaning the business is no longer simply just a play on the cycle, something we believe the market does not appreciate currently, and which we explore further in this note."

JPM said its work suggests that the US non-residential outlook is not as bad as feared; mega projects will be a key driver of growth over the coming years; the group should continue to see significant market outperformance, supported by multiple drivers; and rental rates can remain resilient as catch-up replacement capex and disposals re-balance supply/ demand.

"While the Q3 24 print will be soft (albeit well flagged), we forecast US and group organic rental revenue compound annual growth rate of 8% for FY25-26 with our upside scenario implying 13% growth," it said.

JPM said that with the shares now trading at a 7% discount to their five-year average on EV/EBITA and at their widest discount to United Rentals - its closest peer - in five years, it sees the risk/ reward as attractive. It also reckons that as investors get more conviction on the earnings trajectory, shares should rerate through the year, with scope for earnings upgrades too.

Berenberg re-initiated coverage on shares of software firm Kainos with a 'buy' rating and 1,315p price target, citing an attractive entry point.

The bank said Kainos is a high-quality business that has demonstrated unusually strong revenue growth and consistently high cash returns on capital over an extended period.

"The company has developed a reputation for strong execution, driving high levels of customer satisfaction and best-in-class revenue retention," it said.

"The business is currently undergoing a cyclical slowdown in growth, and trades below its pre-Covid-19 average P/E multiple.

"In the context of a long runway for mid-teens revenue growth, margin accretion potential and, in our view, the likelihood that growth rates are close to troughing, a 4.6% free cash flow yield looks an attractive entry point."

Berenberg highlighted Auction Technology Group (ATG), Moneysupermarket.com and Trainline as potential M&A candidates as part of its review of the UK-listed technology, media, and telecom (TMT) sector.

The past two years have seen a large number of UK-listed TMT names being bought out, such as Ideagen, EMIS Group, Micro Focus, Kape Technologies and Euromoney Institutional Investor - something that Berenberg thinks will continue into 2024.

"The trend of UK TMT companies being acquired continued in 2023, typically by US strategic or private equity buyers," Berenberg said in a research note. "We expect this trend is likely to continue, especially when considering the discount applied to the UK market versus, in particular, the US market."

ATG's business model has already attracted the interest of private equity investors, the broker said, and its business model "lends itself nicely to private equity, with optionality to make operational improvements and also increase leverage beyond the appetite of public markets".

Moneysupermarket.com could be up for grabs by an investor following recent share price weakness, with the stock having now fallen nearly 40% since peaking in mid-2019. What's more, price comparison peers uSwitch, confused.com and Facile have all been snapped by private equity entities.

As for Trainline, the company "exhibits all of the hallmarks that private equity likes: highly cash generative, large addressable market opportunity and structural growth drivers", Berenberg said.

Elsewhere in the sector, Berenberg downgraded its stance on media and publishing company Future from 'buy' to 'hold', and cut its price target from 1,780p to 850p, saying there are "lots of unanswered questions" regarding the outlook and return of organic growth despite the stock's "cheap" valuation.