A 'sell' recommendation on Ocado Group PLC (LSE:OCDO) from JPMorgan has been removed, though the investment bank says the robot-warehouse specialist is not one of its top picks in a European internet sector where bond yields are a “key driver”.
The investment bank sees a brighter outlook for the sector in 2024 based on improvements in profitability and cash flow, an expected fall in bond yields and increased merger & acquisition activity.
“Having favoured the high margin, low debt (often net cash) names in the online classifieds sector in the past two years, we now turn our sector preference towards names with strong earnings momentum, higher leverage & scope for M&A,” analysts at the bank wrote in a note to clients on Wednesday.
With bond yields seen as an important driver for the sector's shares, after three years of an uptrend, with US and German long-dated government bond yields rising 400 basis points, the bank's strategists now expect bond yields to move lower.
“This should offer upside for Internet equity valuations, currently on historical lows for most of the sector,” the analysts said.
An additional positive, they added, “in contrast to many other sectors, earnings momentum looks attractive for the space after strong efforts in regards to profitability and a large proportion of growth driven by structural (rather than cyclical) benefits.”
As a result, the bank highlighted its top picks as Trainline PLC (LSE:TRN) from the UK and rated 'overweight' and with a share price target hiked to 350p from 316p.
The same rating was also applied to German quartet HelloFresh, Delivery Hero (ETR:DHER, OTCQX:DLVHF), CTS Eventim and Stroer.
The food delivery sector is seen as being set to benefit from materially improved profitability/cash generation levels while duration assets benefit from bond yield movements.
However, while Ocado was upgraded and its price target increased to 600p from 400p, it was only to a ‘neutral’ rating. Deliveroo PLC (LSE:ROO) and Just Eat Takeaway.com NV (LSE:JET, NASDAQ:GRUB) are also rated ‘neutral’.
Less favoured by the bank are THG PLC (LSE:THG) and Auto Trader Group PLC (LSE:AUTO), both rated ‘underweight’. Scout24 was also downgraded.
Future PLC (LSE:FUTR) was kept at 'overweight' but its target price cut to 1685p from 1900p. The price target for Auction Technology Group PLC (LSE:ATG) was cut to 582p from 750p and it was kept on a ‘neutral’ rating.