Broker tips: Drax, Midwich, Smith & Nephew, IMI

(Sharecast News) - Citi downgraded Drax to 'sell' on Wednesday as it argued the shares have re-rated "unjustifiably" on the hope of further government support - a view the bank does not share before the general election. "This appears even more unsustainable economically given cost of biomass, against the backdrop of falling power prices," Citi said. "With nuclear life extensions and new build gas capacity on the horizon, the argument for Drax to receive further subsidies to support reserve margins is becoming less compelling."

The bank also sees downside risk from the ongoing National Audit Office and Ofgem investigations.

Analysts at Berenberg lowered their target price on audio-visual distributor Midwich from 800.0p to 710.0p on Wednesday following the group's recent full-year trading update.

Berenberg said Midwich's update pointed to "a record performance", despite a continuation of the challenging markets, with revenue up roughly 7% year-on-year at £1.3bn and adjusted pre-tax profits expected to be roughly £50.0m, in line with expectations.

Despite this, Berenberg lowered its earnings per share forecasts for the 2023 and 2024 trading years by 5% and -6%, respectively, reflecting higher-than-expected minority interests in the current year and "introducing conservatism" into its forecasts as market conditions "remain challenged".

Conversely, Midwich's better-than-expected cash generation in 2023 delivered year-end leverage of 1.3x, versus the German bank's 1.5x estimate, signalling "comfortable (and more) firepower" to support the group's M&A strategy.

"All considered, we are encouraged by this morning's update, with management having proved its ability to navigate tough markets," said Berenberg, which reiterated its 'buy' rating on the stock.

Bank of America Merrill Lynch upped its price target on Smith & Nephew to 1,320.0p from 1,180.0p on Wednesday and maintained its 'buy' rating on the stock.

Despite the share price recovery of around 20% since October's ten-year low, the bank thinks Smith & Nephew remains one of the few value opportunities in EU MedTech, with potential upside since the share price remains around 10% below the Covid trough.

"While the Orthopaedics challenges have been a big overhang for the equity story, we are now seeing some light at the end of the tunnel: Supply chain has improved, and efforts are focused on sales reps' efficiency," it said. "As we start to see normalisation, we look at several opportunities for Ortho. CORI robot, cementless mix shift and the AETOS shoulder could all contribute materially to group sales and profits."

Finally, BofA said its reverse sum-of-the-parts suggests no value for the Ortho business in S&N's current market value, which it reckons is unfair.

Goldman Sachs upgraded shares of engineer IMI to 'buy' from 'neutral' and lifted its price target to 2,020.0p from 1,780.0p, saying it sees around 30% upside versus 17% for the sector.

The bank said it sees IMI as a beneficiary of both a sustained capex super-cycle as well as a potential recovery in short-cycle industrial production, where recent ISM manufacturing PMIs suggest inventories may be approaching a trough.

"Our more optimistic view on demand across Critical and Hydronic Engineering supports FY25e sales/EPS forecasts that are circa 2%/5% above consensus," it said. "Moreover, IMI's shares have historically outperformed during the trough-to-peak phase of the manufacturing PMI cycle, and we see scope for the shares to outperform over the next 12 months."