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Broker tips: Supreme, Softcat, Pearson

Analysts at Berenberg initiated coverage on batteries and lightbulbs distributor Supreme at ‘buy’ on Tuesday, stating the group was “supremely well positioned”.
Berenberg said Supreme, which owns, licenses and distributes a variety of consumer brands, has repeatedly expanded into new product categories for more than a decade and had become “a key supplier” for customers like B&M and local convenience stores.

The German bank also highlighted that Supreme now boasts the largest vaping brand in the UK, and noted that it was continuing to “add strings to its bow”, with recent entries into the sports nutrition, vitamin and household product markets.

“With the shares offering a 3.6% dividend yield and double-digit earnings growth, we think they remain good value,” said Berenberg, which slapped the stock with a 220.0p target price.

Berenberg also stated that Supreme generates “outstanding” returns on invested capital, 59% in 2020 and still trending upwards, due to the asset-light nature of its distribution business and the efficiency with which it has set up its own manufacturing capabilities in vaping and sports nutrition.

Morgan Stanley initiated coverage of Softcat on Tuesday as it took a look at the software and services sector.

The bank started IT infrastructure provider Softcat at ‘overweight’ with a 1,750.0p price target, noting the company has grown 100% organically since inception, delivering 15 consecutive years of net revenue growth, with no use of debt/leverage.

“Softcat benefits from a best-class-returns profile (we forecast 60% return on capital employed for FY21),” MS said. “The company has continued to invest through Covid, while the 50% SME exposure should contribute a sharp rebound in 2021.”

The bank said it’s confident in Softcat’s ability to continue to outgrow the market/drive earnings upgrades. MS forecasts circa 11% organic revenue compound annual growth rate for FY21-24 and about 10% earnings per share CAGR.

“Softcat trades at circa 30xFY22 price-to-earnings or 3.3% free cash flow to the firm yield, above peers – we expect this premium to expand, underpinned by superior growth/returns,” it said.

Société Générale has downgraded its rating for Pearson to ‘hold’ after a strong run for the blue chip’s shares.

The bank, which previously had a ‘buy’ rating on the educational publisher, said the digital acceleration driven by Covid-19 helped Pearson’s “much-needed” print-to-digital transition, adding: “New chief executive Andy Bird has outlined a five-year vision that takes advantage of this momentum without kitchen sink investment.”

It continued: “We update our model to reflect guidance given at the full-year results, albeit with some headwind from currency and no buyback, resulting in -23% and -9% adjusted earnings per share downgrades for 2021 and 2022.

“Our target price rises to 865p as we reflect the far more important reduced risk in our valuation approach. But with the shares having enjoyed a strong run – +46% over the last 12 months and +19% over three months – and our revised target price offering a more modest 9.5% total shareholder return, we downgrade our rating to ‘hold’.”

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