- M&S set to capitalise on gains made by food business
- Shell continues to throw off cash
It’s difficult to look at brokers’ predictions for the year ahead without a sense of déjà vu creeping in, given that the same assumptions about a recovery from coronavirus disruptions are being made once again this year.
But 2022 is not exactly the same as 2021. The now-dominant Omicron strain appears to be milder than earlier versions, and the Conservative party looks unwilling to tolerate much in the way of further restrictions. That could mean lockdowns are a thing of the past, according to FinnCap’s head of research, Raymond Graves.
“Instead, the bigger issues for investors to deal with in 2022 are cost inflation for business (which is already hitting earnings momentum) and markets that start from elevated levels,” he said.
UBS expects the leisure sector to benefit, with a “Covid discount” on shares, averaging around 15 per cent, set to unwind. It has raised earnings estimates for several companies accordingly, upgrading Intercontinental Hotels Group (IHG) to a buy recommendation, with a price target of 5,575p. It expects the operator of the Intercontinental and Crowne Plaza brands to capitalise on the growth of hotel construction projects in the US and a recovery in corporate travel. IHG also has “stronger pricing power” than many competitors, which will prove useful in an inflationary environment, it argued.
Whitbread (WTB) is UBS's top European hotels pick, though, with the Premier Inn brand set to benefit from a strengthening UK market, where a full recovery in revenue per available room is expected by next year.
Home advantage
With the domestic market having underperformed US and global peers for several years, there is currently “a lot of value out there if you look” in UK equities, said Mark Hiley, managing partner of independent research house The Analyst.
“We have been very keen on retailers for some time, especially M&S (MKS) which is showing signs of fighting back against online,” he said. M&S’s food retail arm was the biggest gainer of grocery market share in the 12 weeks to Jan 1, according to NielsenIQ data. Its 9.4 per cent year-on-year sales growth bettered discounters Lidl (8.5 per cent) and Aldi (4.8 per cent), although both have a larger overall market share.
“Centrica (CNA), too, [has] gone through a complete change of management, slimmed down and is much more focused,” Hiley said, adding that the energy company is likely to benefit from tighter regulation following the failure of many competitors.
Shell (RDSB) is another energy business that remains a broker favourite. Jefferies expects the company to generate about 90 per cent of its current market capitalisation of £130bn as free cash flow over the next five years. Royal Bank of Canada analyst Biraj Borkhataria said this allows it to deleverage at the same time as boosting shareholder returns.
The large cap commodities play preferred by Hargreaves Lansdown is miner Anglo American (AAL), whose record half-year profit was boosted by increases in iron ore, rhodium and copper prices as economies reopened.
“If prices remain elevated into 2022, Anglo’s profits should reap the benefits,” the broker said, identifying the company as one of its five top picks for the year ahead.
Gaining interest
Another of Hargreaves' top picks is Lloyds Bank (LLOY), which should gain from higher interest rates and a more benign economic outlook.
With a Common Equity Tier 1 capital ratio of 17.2 per cent, which is “miles ahead” of the board’s minimum requirement of 12.5 per cent, the lender has “spades” of excess funds it can use to grow its loan book, buy rivals or return to shareholders, Hargreaves Lansdown said.
Numis tipped competitor NatWest (NWG), forecasting an upside of 20 per cent to its share price if the Bank of England raises interest rates to 0.75 per cent.
A racier option is London-listed Bank of Georgia (BGEO), which Numis analysts argued could offer a payback of up to 10 times over a decade under its ‘drab’ scenario of returning 20 per cent on equity a year - at the lower end of its target range. A (much) more bullish set of assumptions involving the lender consistently achieving a a 25 per cent return on equity, an appreciation of the Georgian lari against the pound and a re-rating of the bank’s share price could generate a return of 100x over 20 years, it argued.
These seem like fairly big assumptions, though – especially in a country whose politics appears to be increasingly polarising, with opposition leader (and former president) Mikheil Saakashvili recently going on hunger strike after being thrown into jail. The presence of Russia next door will also be concentrating minds at the moment.
Another share that isn’t for the faint-hearted is Venture Life (VLG), a consumer health products group that now has a market cap of less than £50m after three profit downgrades led to a 60 per cent slump in its share price over the past 12 months.
The company, which owns the Dentyl mouthwash and Myco Clear fungal nail treatment brands, among others, has faced challenges such as customers reducing inventory to save on costs, supply chain and logistics struggles and an underperforming partner in China. A new Chinese partner has been found, though, and house broker Cenkos Securities believes other issues could be resolved soon. At a price of 6.6-times adjusted earnings, it is “too cheap to ignore” for a profitable, growing and cash-generative business, the broker argued.
Outside chance
Cenkos also tips Brighton Pier Group (PIER) as another bargain share. It owns a disparate bunch of assets including Brighton Palace Pier and the recently-acquired Lightwater Valley theme park in North Yorkshire, as well as eight indoor mini-golf sites and eight bars. The pier and the theme park have benefited from staycation trends as well as a preference for outdoor activities. Although the former trend might reverse as more countries reopen borders, the latter could be with us for some time, the broker added. It recently upgraded its earnings per share forecast by 85 per cent as it expects revenue to more than double to £37m.
A much bigger group by size, if not by value, is Costain (COST). The Maidenhead-based contractor employs more than 3,000 people and made almost £1bn in sales in 2020 but has a current market capitalisation of less than £150m, which is below the £190m book value of its equity as of June 30.
OK, so contractors make terrible margins and Costain recorded pre-tax losses in both 2019 and 2020, but Liberum argued that the bad news around recent problem contracts is now behind it. It said there is a case for a re-rating of its shares, given the expected increase in infrastructure spending by the UK government.
The levels of investment pouring into warehouses as online retailers clamour for space makes Somero Enterprises (SOM) a good bet, FinnCap said. The company makes laser screed equipment that ensures floors are perfectly flat and trades at a significant discount to its peer group, the broker added.
Shedding inhibitions
The same market dynamics lie behind Liberum’s tip of Tritax Big Box (BBOX). The UK’s biggest warehouse-focused real estate investment trust recently raised a further £300m through a placing to help speed up delivery of its development pipeline. The Reit trades at a healthy premium of more than 20 per cent to its net asset value per share, but the broker’s estimates suggest further upside of 50 per cent based on the value of its built-out portfolio.
Peel Hunt’s pick in this sector remains Warehouse Reit (WHR), despite a gain of 40 per cent in its share price over the past year. It also trades at a (14 per cent) premium to its net asset value, but its “material” development pipeline, including a large site in Crewe, offers potential, the broker added.
Peel Hunt also recommends retailer JD Sports Fashion (JD) among its growth stock picks, which is another share that could hardly be described as a bargain when compared to its high street peers. It has consistently outperformed them over the past five years, but a sector-wide sell-off in the run-up to Christmas mean that its shares “look very good value right now” at a price of less than 20-times forecast earnings.
“A PE in the mid-20s is more our idea of fair value,” the broker said.
A word of warning with these tips is that in many – though not all – cases there will be an ongoing relationship between the brokers and the companies they are tipping, specifically when the former serve as corporate brokers for the latter. As ever, investors are encouraged to carry out their own research.
