Broker tips: Derwent London, Ithaca Energy, Sage

Analysts at Berenberg lowered their target price on property investment and development business Derwent London from 2,800.0p to 2,450.0p on Tuesday, stating the group was "not immune" from market movements.

Berenberg said interim reporting from Derwent's London office peers and market data highlighted "a valuation decline" which was more significant, and happened more quickly, than its prior expectations.

The German bank stated that ahead of Derwent's full-year 2022 results statement, expected in February 2023, it had opted to amend its guidance, leaving earnings forecasts largely unchanged but net tangible assets projections 10.5% lower.

"Derwent remains a standout company, with a stand-out track record, a high-quality management team, sector-leading ESG disclosure, and significant future development optionality," said Berenberg, which maintained its 'hold' rating on the stock.

"However, despite all of this, it operates in the most cyclical sector of the UK real estate sector – London offices – where we forecast numerous near-term headwinds. As a result, despite a valuation multiple 38% below the long-term average, there are better risk-adjusted opportunities available elsewhere in the sector, in our view."

Analysts at Jefferies initiated coverage of Ithaca Energy on Tuesday with a 'buy' rating and 245.0p price target on Tuesday.

Jefferies said this represents 38% upside for a company it believes to have the highest pro forma 2P reserves life among North Sea peers but was now trading at almost a 20% dividend yield post-initial public offering on increased UK oil and gas taxation.

The bank estimates Ithaca's pro forma 2P reserves at 16.3 years, compared to Aker’s 14.9 years and Harbour Energy's 8.5 years.

Jefferies also stated that an additional tax hit was an unavoidable impact to all UK producers but Ithaca's "consistent, coherent strategy focused on growth and returns" was a "compelling proposition".

UBS downgraded software firm Sage to 'sell' from 'neutral' on Tuesday and cut its price target on the stock to 720.0p from 745.0p as it argued that margin pressures were set to persist.

"While Sage enjoys a defensive topline profile entering FY23 we believe ongoing margin pressures were masked last year by bad debt provision reversals and the benefit of a major restructuring round," UBS said.

It also said that the recently-concluded acquisitions of Lockstep and Brightpearl had enhanced the offering but also brought losses that will result in a full-year impact in FY23.

"As Sage moves to emphasise underlying metrics over organic its management incentive programme also shifts, potentially implying more M&A given a margin underpin on average rate of return growth likely beneath current levels (FY 22: 16%)," the bank said.

UBS noted that consensus expectations were for sales to grow at an 8% organic compound annual growth rate through FY25 with margins reaching 21.5%, a 70 basis points a year improvement.

"Even absent future M&A we see this as challenging and are at 20.5%; 110bp below consensus," it concluded.