Broker tips: Melrose, Legal and General, Energean

(Sharecast News) - JP Morgan has placed Melrose on 'positive catalyst watch' ahead of the British manufacturing group's full-year results, saying it expects "good news to keep coming". The bank also labelled the stock a top pick for 2024 as it issued it with a target price of 620.0p.

"Given the momentum in the business seen through 2023, we expect Melrose to meet the top-end of the 2023 guidance (at least) and raise the 2024 guidance to ahead of consensus expectations at the prelims," JP Morgan said ahead of the results due on 7 March.

In November, the company upped its adjusted operating profit estimates by 7% to £400-410m, as a result of a stronger improvement in underlying margins.

"Melrose remains a key pick for us in 2024: an aerospace pure-play with a credible margin story, further upside to forecasts and a sizeable buy-back supporting the shares," JP Morgan said.

Berenberg upgraded its rating for insurance and investment group Legal & General from 'hold' to 'buy' on Monday, saying that the macro environment should support the shares heading into 2024.

"At the start of 2023, the macroeconomic environment was not supportive for Legal & General shares," said analyst Thomas Bateman, who also raised his target price on the stock from 258.0p to 289.0p.

Investor concerns about credit risk and property valuations have hampered the stock since January 2022, said Berenberg, but it thinks the tide was set to turn going into 2024, driven by a greater certainty about the interest-rate outlook.

Looking ahead, Bateman said: "Fears of credit risk and real estate valuations are subsiding, but the benefits of higher interest rates for L&G, such as strong annuity volumes, are here to stay, and we expect strong annuity volumes to drive a step-up in capital generation."

Meanwhile, he said that L&G offers one of the best dividend prospects for income investors, being the seventh-highest yielding stock on the FTSE 100, trading at an 8.5% 12-month forward dividend yield. A predicted "step-up" in capital generation growth could also drive higher dividends, Bateman said.

Analysts at Berenberg also lowered their target price on hydrocarbon exploration and production company Energean from 1,520.0p to 1,430.0p on Monday after revising its model on the group's Israeli operations and incorporating its recent Moroccan acquisition.

Berenberg stated that overall, the long-term cash flow and dividend story at Energean remained intact and that it believes the stock's current valuation to be "attractive". However, Berenberg noted that this was dependent on one's "level of comfort" with the current state of affairs in Israel.

"So far, there has been no operational issue or cause for concern in relation to Energean's infrastructure, although any escalation is likely to again increase the risk premium," said Berenberg, which reiterated its 'buy' rating on the stock.

"Assuming this remains the case, our investment thesis on the company's long-term cash flow visibility, supported by the contracted pricing in Israel, remains unchanged. On our updated estimates, the company will generate an average FCF yield in 2024-2030 of 42%, which will more than support a dividend yield of 17% assuming the payout ramps up to $100.0m per quarter in the short term. The cash flow will also enable rapid deleveraging with net debt/EBITDA below 1.5x by the end of 2025."

The German bank said its price target was set to provide roughly 40% upside from the current price.