Broker tips: Softcat, C&C Group, Jet2

(Sharecast News) - Berenberg upgraded IT infrastructure and services provider Softcat on Friday to 'buy' from 'hold' and reiterated its 1,900.0p price target on the stock.

"With the shares now off 28% since highs, 200 basis points worse than our mid-cap TMT (technology, media and telecoms) universe, we think now is the time to look again," it said.

The bank said resellers were among its favoured stocks within its UK TMT coverage.

"Not only are they beneficiaries of investment in digital transformation, which is showing no signs of slowing down, but we think they are less exposed to current risk variables in the market, as we detailed in our latest TMT sector note.

"With peers all reporting strong results in recent weeks, we think Softcat's revenue is likely tracking ahead of consensus FY22 run-rate forecasts."

Berenberg said operating costs were likely to have been lower in the first half too, given the Omicron wave.

"We, therefore, believe there is scope for outperformance at next week's first-half results and if current market rates of growth can continue, we could possibly see significant upgrades in the second half too."

Shore Capital upgraded drinks maker C&C Group to 'buy' from 'hold' on Friday as it highlighted a depressed valuation and said that with Omicron concerns easing and hospitality reopening, the key on-trade channel should continue to improve over the coming months.

The broker also said that C&C's trading update earlier this week pointed to a better-than-expected outturn for FY22 than previously feared.

"Given the current depressed valuation, relief over the potential impact from Omicron and the numerous levers the group has to manage cost inflation, we take this opportunity to upgrade," it said.

ShoreCap noted that with Covid-related restrictions lifted, including Ireland, the hospitality industry was now reopening, restocking and delivering.

"The key to the investment case is recovering cost inflationary pressures and returning profitability to pre-Covid levels, which we forecast in FY24F.

"Beyond this, we are encouraged by management comments on the potential to achieve 4% margins in distribution, whilst we also see opportunities to broaden its brand portfolio and for structural changes in wholesale."

Shore Cap pointed out that Bulmers and Magners owner C&C was valued at just 8.0x fully recovered EBITDA, which it sees as a sharp discount to its historic metrics.

Analysts at Canaccord Genuity issued package holiday group Jet2 with a 'buy' rating and a 1,600.0p target price after placing the stock under review.

Canaccord Genuity said Jet2 potential's for profit recovery, careful market share gains supporting long-term earnings per share growth and equity-free cash flow suggested the firm was capable of supporting higher longer-term upside.

The Canadian bank sees a roughly 6% EPS compound annual growth rate between 2023 and 2026, reflecting market recovery, an improving revenue mix, and a strongly supported pre-tax profit despite likely summer 2023 pressures.

"Our forecasts envisage an almost flat PBT in 22/23E and no margin expansion beyond ~6% so these could potentially be conservative," noted the analysts.

Canaccord also added that summer 2022 will be the first "normal summer" after competitor Thomas Cook's exit from the market but cautioned Summer 2023 carried "potentially higher risks" for the UK consumer.

However, Canaccord thinks Jet2's "flexible business model" and ability to take market share will be demonstrated by this, which may lead investors to apply a higher multiple - though the analysts think this will be a "show me" story.