Broker tips: Drax, Croda, Babcock

(Sharecast News) - JPMorgan Cazenove cut its price target on Drax on Thursday to 740p from 830p as it lowered its valuation for the stock. JPM noted that since the middle of August, the shares are down 27% as investors have become more concerned about the company's use of working capital management tools, including receivables factoring. "We believe that this reaction is overdone," it said.

"We acknowledge that we previously underestimated the company's use of these tools, which has increased, particularly in 2022, and we agree that the cost of using these tools has increased (as has the cost of financing in virtually all markets).

"Still, we believe that the market is being too harsh in the way it values the use of these facilities, particularly as it relates to factoring receivables. We have lowered our Drax valuation, incorporating what we see as a conservative valuation adjustment for Drax's use of working capital management, as well as our view of conservative assumptions around profitability and value creation."

The bank now includes a £171m (44p) adjustment in its valuation for Drax's use of receivables factoring, which it said is conservative yet still below the £400m+ it believes bearish investors view as the right figure.

JPM maintained its 'overweight' rating on the shares.

Deutsche Bank slashed its target price for Croda from 5,600p to 5,200p and maintained a 'hold' recommendation, saying it expects disappointing guidance from the speciality chemicals company at its next update.

"We have updated our model prior to the Q3 trading update which we expect to be announced within the next two weeks," Deutsche Bank said.

Analysts expect management to "narrow down if not slightly lower" the guidance range for full-year underlying pre-tax profit, previously forecast at between £370m and £400m.

Deutsche Bank had already sat below guidance with a £365m estimate and so have left it unchanged. However, forecasts for the next two years have been cut by 7-8% "mainly due to lower expected earnings in Life Sciences (due to lower lipid sales/earnings)", the bank said.

The stock trades at 23 times forward earnings after derating materially - shares are down nearly 30% since the start of 2023 - but Deutsche Bank still doesn't see any upside.

"With ongoing volume volatility in Consumer Care and a lack of visibility, we struggle to see value even at the current multiple. Hold."

Defence and civil specialist equipment manufacturer Babcock reported an "encouraging" start to the financial year, though that wasn't enough for analysts at Liberum to change their neutral stance on the stock.

The broker reiterated its 'hold' rating and 400p target price, slightly under Thursday morning's level of 405.76p, up 4.5% on the day.

Liberum said the price-to-earnings ratio of 9.8 might look cheap compared to historic multiples but it regards the valuation as "fair value given limited revenue growth hand better opportunities elsewhere".

In an update for the first five months of the year ahead of its annual general meeting, the company hailed good organic revenue growth, an improved operational performance and higher cash flow compared to the same period a year earlier.

Liberum said the statement, which didn't include any financial details, suggests trading was in line with forecasts, with the broker predicting first-half organic revenue growth of around 10% and fully diluted earnings per share (FD EPS) of 19.5p, compared with 6.7p the year before.

"We maintain our FY24 and FY25 FD EPS estimates, noting potential upside if Nuclear Infrastructure continues to track ahead."