Broker tips: Gamma Communications, Hostelworld

(Sharecast News) - Analysts at Berenberg lowered their target price on communication services and solutions provider Gamma Communications from 2,000.0p to 1,570.0p on Friday as it said macro pressures on UK SMEs had forced it to lower forecasts. Berenberg said that following Gamma Communications' annual general meeting trading update in May, it had reiterated its 'buy' rating on the stock but had opted to lower its DCF-based price target. However, Berenberg noted that its new target price still offered an "attractive" potential share price upside of roughly 31%.

"We cut our group EPS five-year CAGR forecast to 9% from 11%, driven by our expectation of lower organic growth in the UK Business division," said the German bank.

"We continue to expect a valuation re-rating in the Gamma shares from current levels (trading at 13x P/E and 8x EV EBITDA). We still believe there is further share price upside potential from more value-accretive M&A or additional shareholder distributions given headroom provided by Gamma's strong FCF generation (c8% FCF yield) and under-leveraged balance sheet."

Shore Capital has reiterated its 'buy' rating for Hostelworld, hailing the group's social network-led transformation and recent investments to drive long-term growth.

The broker gave the stock a fair value estimate of 230.0p, suggesting significant upside from Friday morning's price of 118.0p.

Analysts said Hostelworld has built a "strong foundation of trust" between its customers and suppliers, which is reflected in its performance since Covid, with bookings, revenues and adjusted EBITDA now all back above FY19 levels.

The company's member network - 80% of group bookings from its 2.6m-member network - and content-rich social booking platform are now a valuable part of its investment case, helping retention rates and engagement with the brand, Shore Capital said.

"HSW has built a leading tech-led travel business, which differentiates itself from other OTAs due to its high expertise in hostels, key industry relationships, and now social features. We believe this provides a solid foundation for scaling the business, while retaining an asset-light, cash-generative structure," the broker said.

Shore Capital also highlighted Hostelworld's ambitions to expand its current market coverage - through opportunities in Latin America and Asia - as well other enhancements such as a new ranking system to boost commission rates and a new low-cost customer acquisition channel.