Interactive Investor

12 UK stocks make this list of buy ideas

This team of analysts has 32 companies on its new list of conviction ideas for 2024, but only a dozen are in the UK. City writer Graeme Evans reveals their names and why they’ve been picked.

14th March 2024 13:53

by Graeme Evans from interactive investor

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Rolls-Royce Holdings (LSE:RR.) and the “high-quality” value names of GSK (LSE:GSK) and Imperial Brands (LSE:IMB) today featured on a City bank’s list of 32 European conviction stock ideas.

The other London-listed companies in the selection by UBS are BP (LSE:BP.), Anglo American (LSE:AAL), Tesco (LSE:TSCO), Whitbread (LSE:WTB), easyJet (LSE:EZJ), Intertek Group (LSE:ITRK), ConvaTec Group (LSE:CTEC), Beazley (LSE:BEZ) and Just Eat NV (LSE:JET).

The UK stocks among 22 conviction “Sell” ratings are AstraZeneca (LSE:AZN), BT Group (LSE:BT.A), Burberry Group (LSE:BRBY), Diageo (LSE:DGE), Rentokil Initial (LSE:RTO), Auto Trader Group (LSE:AUTO) and the FTSE 250-listed IT services firm Softcat (LSE:SCT).

The support for Rolls-Royce follows a 220% advance for its shares in 2023 and a further rise of 30% to nearly 390p so far this year, driven by better-than-expected earnings.

The performance has almost caught up with the bank’s most recent 400p target price, which uses a cost of equity four percentage points higher than peers at 14%.

This gap reflects an element of caution due to the company’s historical execution challenges, but in an upside scenario UBS sees the shares reaching 600p.

On GSK, the bank is well ahead of the City consensus for 2026 earnings and beyond. This is due to higher expectations for China sales of shingles vaccine Shingrix, a greater shift towards newer HIV drugs and a mix shift towards older adult vaccines with uplift in margins.

The base case for shares is a 10% upside to 1,860p, but with an upside scenario of 2,160p.

UBS regards GSK as better placed than rival AstraZeneca in terms of exposure to the US Inflation Act, which increases mandatory discounts on certain drugs. The bank expects a $2 billion (£1.6 billion) revenue drag for Astra’s high margin products Tagrisso, Imfinzi and Calquence.

Alongside GSK as the UK’s other “high-quality” value selection is Imperial Brands, whose shares have been backed to rise by around a third to 2,260p. The bank notes a marked improvement in competitiveness while it looks for Imperial to return £14 billion or 90% of its current market capitalisation via dividends and buybacks over the next five years.

It added: “We do not expect the company to face significant regulatory hurdles over this period, with a US menthol ban unlikely to be implemented before 2028-29 at the earliest.”

BP shares have derated by 25% relative to the sector over the past 12 months, but UBS is encouraged by a number of near-term positive catalysts, including higher dividends.

Its 2024-25 payout estimates are 6% ahead of the City consensus on average, reflecting greater confidence in cash flow coming from a growing proportion of low-carbon earnings and more stable upstream margins.

The bank’s base case is for shares to reach 600p, with an upside scenario of 850p dependent on oil prices at $100 a barrel.

Tesco is the bank’s top pick in the food retail sector, noting that the supermarket’s record and market leadership puts it in a strong position to grow further into the 2025 financial year and for buybacks of £750 million a year.

The chain, whose valuation multiple of 10.6 times 2025 earnings is closer to its post-financial crisis low than its five-year average of 13 times, is backed with a 315p target price.

Premier Inn owner Whitbread is another market leader that UBS believes is deserving of a higher rating in the City.

The bank said: “The company has a strong balance sheet to continue its roll-out in the UK and drive the less mature German business to profitability. We think discipline around capital and the current share buyback programme should well underpin the shares.”

Whitbread is currently trading at about nine times forecast earnings, compared with UBS expectations of 10 times and a target price of 4480p.

Among the other “Buy” recommendations, the bank believes the risk/reward is now attractive at Anglo American after a 50% fall for shares in the past year caused by weakness in platinum group metals and diamonds and concerns about the Woodsmith polyhalite mine project.

UBS’ base case is for shares to reach 2,500p, while it sees Beazley at 775p, easyJet at 820p, Intertek at 5,900p, ConvaTec at 360p and Just Eat at 2,170p.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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