Broker tips: JD Sports, Dunelm, Hikma Pharmaceuticals

(Sharecast News) - Citi initiated coverage JD Sports on Monday with a 'buy' rating as it took a look at European sporting goods.

The bank noted the US remains the largest sportswear market globally, but said Asia-Pacific represents the largest growth opportunity.

"In China, we believe international brands can start to regain share from domestic brands in 2024, supporting growth despite the weaker macro (including Adidas, consistent with early signs from Citi's Proprietary China survey)," it said.

As far as JD Sports was concerned, Citi said it sees "a significant opportunity" for the retailer to deploy capital, generating returns above its weighted average cost of capital, with cash generation supported by working capital control.

RBC Capital Markets upgraded Dunelm to 'sector perform' from 'underperform' and increased its price target on the stock to 1,100.0p from 1,000.0p as it said the company remained "a strong player" in UK retail.

RBC said Dunelm had delivered good execution in recent years and had a strong track record of market share gains across the last decade.

It noted the shares have fallen around 15% over the last three months and said that at roughly 13.0x CY24e price-to-earnings, Dunelm was trading towards the lower end of its historical valuation range.

"We view this as fair given Dunelm's well-managed, cash-generative model, albeit a relatively challenging outlook for home-related sales. Hence, we upgrade to sector perform," it said.

RBC also noted that Dunelm has consistently been one of the most price-competitive retailers in its UK entry point homewares pricing survey.

"We think it has further strengthened its value positioning this year, by re-investing freight tailwinds into more than 1,000 price reductions in Spring 2023. Given a still tough outlook for the UK consumer in 2024, we think consumers will remain focused on value, which should favour the likes of Dunelm," it said.

Analysts at Berenberg reiterated their 'hold' rating and 2,100.0p target price on Hikma Pharmaceuticals on Monday, stating a "lighter" second half was playing out in its injectables unit.

Berenberg stated that although Hikma shares have given up some of their gains over the past month, down roughly 11% over the period, it noted that these moves were similar to those of generic and speciality pharma sector peers. However, it also said it does not see any near-term catalysts to help Hikma re-rate.

The German bank updated its model to factor in new guidance across all three divisions, as well as higher finance costs of roughly $85.0m.

"Our price target is unchanged and, with shares trading on c8x EV/EBITDA (in line with sector peers), valuation looks fair. Any visible improvement or deterioration in the US injectables business would make us revisit our investment case," said Berenberg.

Injectables' core operating margin was expected to be closer to 36%, rather than 37%, and revenue growth was seen at roughly 7%, down from 9%, in 2023, mainly due to supply constraints in the US, something management stated was a temporary problem. However, the analysts pointed out that organic top-line trends were already looking light in the first half, tracking 3-4% after stripping out the 5% top-line benefit from mergers and acquisitions. Additionally, Berenberg noted Hikma's ramp-up of sterile drug compounding in the US was "taking more time than expected" as it continues to wait for state licences from New York and California.

"Hikma provided a better-than-expected margin target for the branded division of 23%, thanks to strong MENA (Middle East and North Africa) demand and operational efficiencies. However, FX remains volatile, and the MENA region (with ongoing geopolitical tensions) remains difficult to forecast. Hikma confirmed it has minimal exposure (both sales and production) to affected countries in the region," added Berenberg.