Broker tips: Totally, Croda, Babcock

(Sharecast News) - Analysts at Canaccord Genuity slashed their target price on healthcare service provider Totally from 70.0p to 40.0p on Thursday, stating cost pressures had impacted margins. The Canadian bank noted that Totally's Pioneer unit has "performed strongly", with revenues from elective care services doubling year-to-date and the recently secured national NHS 111 support contract going live and beginning to contribute to organic growth.

However, Canaccord stated that Totally was also facing "similar challenges" to the NHS - including cost inflation, service and schedule pressure from strike action, and a reliance on agency staff to manage clinical workforce shortages in urgent care. In addition, delays to tender processes and ongoing legal discussions regarding certain contracts were said to be "putting near-term pressure on margins".

As a result, Totally issued guidance for roughly £6.3m in underlying earnings in 2023, while net cash was expected to be £5.5m on 31 March, and Canaccord updated its estimates to reflect the firm's update, which results in a reduction of 31% and 22% to adjusted earnings per share for 2023 and 2024.

"Whilst this result highlights near-term challenges which need to be overcome, we continue to believe that Totally is well-placed to support the NHS with high-quality healthcare services across both urgent and elective care over the medium-to-long term," said Canaccord, which reiterated its 'buy' rating on the stock.

Analysts at Berenberg lowered their target price on chemicals Croda International from £84 to £80 on Thursday, stating 2023 looked set to be "a year of consolidation".

Berenberg said that given the headline beat of roughly 2% versus full-year underlying earnings expectations, the approximately 5% fall in the share price triggered by Croda's results was "on first inspection surprising".

The German bank stated that the reason for the share price decline appeared to be that the volume driven sequential decline in underlying earnings margins in its consumer care division was only compensated for by roughly $20.0m higher-than-guided sales of polar lipids in and double digit-percentage volume and price growth in its crop care wing.

"At 27x 2023 P/E, Croda shares trade broadly in line with consumer peers such as Symrise and Givaudan, although we would argue that the growth, margins and barriers to entry on offer in the firm's Pharma business are higher than in consumer ingredients," said Berenberg.

"Croda should benefit from a materially improved top-line growth rate at attractive returns from 2024 once the headwind from lower Covid-19-vaccine-related sales is absorbed and the personal care market recovers."

Citi downgraded Babcock International to 'neutral' on concerns about legacy issues.

The bank argued on Thursday that while the investment case for Babcock was a turnaround story, risk still remained.

"The new management team have a demonstrable track record of bringing greater cohesion and focus to defence companies," it said. "However, managing out legacy is still a source of concern for us."

Citi, which has a 370.0p target price on the stock, added that it would review its position following the full-year results, with a particular focus on the auditor's report.