Broker tips: Essentra, Hostelworld, AB Foods, Marks Electrical

(Sharecast News) - Essentra tumbled on Monday after Deutsche Bank downgraded the shares to 'hold' from 'buy' and cut the price target to 100p from 150p as it said medium-term targets appear increasingly challenging. "We think there is a meaningful risk that heightened input cost inflation, particularly in EMEA, will negatively impact demand through the remainder of FY26, once again deferring recovery prospects for the business," the bank said.

"Post the start of the Russia/Ukraine war, the volume shortfall more than offset any inflation-driven pricing benefit and drove negative LFL revenue growth from 4Q22 to 2Q24," DB noted. "At FY25 results management reiterated its medium-term targets, namely more than 10% constant FX revenue growth per annum (o/w more than 5% organic), circa 18% EBIT margin, 0-1.5x pre-IFRS 16 ND/EBITDA, and circa 18% net working capital/sales."

Deutsche said these targets, particularly the revenue and margin targets, will be increasingly challenging and likely to require a sustained period of buoyant demand, which contrasts with the demand volatility in the last decade.

"We think the leverage range combined with weak historical and FY26 prospective cash generation constrain the group's ability to grow through M&A," it said, as it pointed out that Essentra last achieved an 18% EBIT margin in FY19, and noted the margin profile has been declining since FY17.

"Our analysis of historical drop through margins informs our caution over future margin progression, which we think will require a meaningful organic acceleration that is not our base case," it said.

Analysts at Berenberg initiated coverage on Hostelworld Group with a 'buy' rating and a 171p target price on Monday, stating the firm was "attractively valued" ahead of its next growth phase.

Berenberg said Hostelworld has transformed its business model, from an online travel agent focused on hostels to a global social travel platform - with the transition accelerating over the last two years and the bank expecting to see the benefits of this to support an improvement in revenue and profit growth in FY26.

The German bank said Hostelworld's ransition to a social platform was increasing the competitive moat around the business as network effects and growth in proprietary data support "a positive flywheel effect", driving an uplift in active customers and booking frequency.

"Furthermore, we understand the trend of consumers trading down to lower-cost destinations in recent years - which resulted in a drop in average book value - has tapered off, and its business in Europe has now returned to growth," said the analysts.

However, Berenberg stated that despite "these supportive factors", Hostelworld trades on a full year 2026 price-to-earnings ratio of just 8x, offering "a highly attractive entry point".

"Trading on 8x FY26E P/E, we do not think that the valuation reflects the improving trading environment and Hostelworld's transformed business model, which has significantly enhanced its growth and margin prospects," concluded Berenberg.

RBC Capital Markets downgraded Associated British Foods on Monday to 'underperform' from 'sector perform' and slashed its price target on the stock to 1,850p from 2,050p, sending shares in the Primark owner sharply lower.

The Canadian bank said that as part of its more cautious view on the European retailing sector, it sees further downside risk to consensus earnings forecasts, mainly due to pressure on ABF's largest business Primark.

"Although we think a demerger should make ABF more investable in the long run, we think ABF's valuation is full given more limited growth prospects over the next few years," it said, as it voiced concerns that Primark's value for money perception may be compromised by its attempts to elevate its offer.

Primark aside, RBC said AB Foods' food business was likely to see a mixed performance this year.

Shore Capital has kept a 'hold' rating on Marks Electrical despite the online electrical retailer lifting its full-year profit outlook on Monday

Marks expects revenues of £108.5m over the financial year to 31 March, down 7.4% year-on-year, though this partly reflect its "deliberate focus by the company on higher-margin sales channels as it looks to rebuild profitability", Shore Capital said. Adjusted underlying earnings guidance, meanwhile, was lifted to £2.65m from the £2m-plus range given just three weeks ago, while the net cash position excluding leases was raised to £4.45m from £3.5m-4m.

Guidance for next year was also "encouraging", Shore Capital said, with the firm pointing to growth in both revenue and profitability in FY27.

"Following the positive news in the pre-close trading update on 26 March, we are pleased to hear that following a better-than-anticipated end to the year, management is again raising profit and cash expectations for FY26F," Shore Capital said.

Despite the upgrades, Shore Capital pointed out that Marks was now trading at an enterprise value-to-EBITDA ratio of 15x, down from the 17x mark hit recently but "still relatively high as a result of profit levels remaining suppressed", the broker said.

"The question now is whether Marks can deliver on guidance of both top and bottom-line growth at which point these multiples could quickly become more attractive. While the high level of geopolitical uncertainty leads us to caution in our outlook on the UK, we are increasingly warming to the recovery story at Marks. For now, we maintain our 'hold' rating and target price of 50p with upside risk," Shore Capital said.