Broker tips: Reckitt Benckiser, Aviva, IAG, Whitbread

(Sharecast News) - HSBC upgraded Reckitt Benckiser on Wednesday to 'buy' from 'hold' and lifted its price target on the stock to 5,500.0p from 4,800.0p as it assessed the outlook for consumer staples in 2025.

The bank said Reckitt endured a difficult 2024 with the shares affected by a mix of operational challenges and adverse verdicts in several trials surrounding links between pre-term infant milk formula and necrotising enterocolitis (NEC, an intestinal illness affecting pre-term infants).

"However, we feel that the operational challenges were rather one-off in nature and, excluding these, the underlying performance of its Health & Hygiene business has been quite robust," it said. "Recent months have also seen more favourable developments on the litigation front with one verdict in Reckitt's favour and also a slowing in the pipeline of new cases, which give us more confidence that even if Reckitt does end up settling, the amount would be manageable."

In 2025, HSBC expects the Health and Hygiene businesses to deliver growth of a similar level to 2024 while Nutrition will benefit from easy comparatives. It also expects good strategic progress with the plans to separate Essential Home and Mead Johnson.

"On our updated 2025 numbers Reckitt trades on a price-to-earnings of 14.2x, which is material discount to peers, and offers good scope for re-rating as the group executes on its plans," HSBC said.

Jefferies has reiterated its 'buy' stance on Aviva after the insurer's �3.6bn takeover pursuit of Direct Line was agreed by the latter's board but said that the deal brings major execution risks.

Aviva's share price has fallen around 3% since the 275.0p-per-share offer for Direct Line was accepted on 6 December, after two earlier offers of 250.0p and 261.0p were rejected last month.

"We agree with the market reaction to the deal, because although the financial rewards appear compelling, the execution risks should not be overlooked," Jefferies said.

While the broker acknowledged that the takeover brings "compelling" financial and strategic prospects - from significant operational cost synergies to reducing competition in the market - it highlighted "material execution risk".

Integration of Direct Line's IT systems will be a sticky issue, Jefferies said, because of the company's recent investment programme. "It's not clear which system Aviva ought to decommission. However, as Aviva's book is performing better, it might be safer to write-off Direct Line's investment and move that book to Aviva, even if the systems are older," the broker said.

Meanwhile, Direct Line's strategy since its IPO of "moving down the risk curve" has not been successful in growing earnings sustainably, and Aviva will need to decide whether to "re-risk the book", the broker said.

BA and Iberia owner IAG flew higher on Wednesday after Deutsche Bank upgraded the shares to 'buy' from 'hold' and hiked the price target to 400.0p from 215.0p.

The German bank said constrained capacity on the Transatlantic to/from the UK - a key market for BA at around 40% of revenues - should help IAG to further progress pricing in 2025.

"This is supported by early evidence from our fares tracker and underpinned by the macro outlook for the US, the UK and Spain," it said. "With fuel set to be tailwind, we see scope for another year of ahead-of-consensus earnings growth in 2025 (DBe EBIT +6% versus consensus)."

DB also said margins were set to return to previous peak levels as a minimum and stated that improvements at Aer Lingus, the continued leveraging of the Spanish platforms and growing IAG Loyalty should also help.

Deutsche Bank pointed to an attractive valuation and some potential positive catalysts. It noted that IAG trades on a 2025 EV/EBITDA of around 3.3x, a price-to-earnings multiple of about 5.2x and offers a 3% dividend yield underpinned by a 13% estimated free cash flow yield.

Analysts at Berenberg lowered their target price on Premier Inn-owner Whitbread from 4,000.0p to 3,900.0p on Wednesday following the recent UK budget.

Berenberg said it was reducing its estimates for Whitbread due to the impacts of the UK budget on costs and to reflect the current trading environment implied by peer Travelodge's Q3 results.

However, while Berenberg lowered its price target on the stock, it remains bullish on the medium-term outlook for Whitbread and still expects strong benefits from its Accelerating Growth Plan. It also anticipates seeing Whitbread's German operations to continue to take shape, and the cash-flow generation of the business to fund material shareholder returns.

"We remain bullish on Whitbread's long-term prospects. We expect long-term benefits from the AGP, while the profitability inflection from Germany, as well as cost efficiencies and organic growth, provide scope for material PBT expansion and cash-flow generation over the coming years," said the German bank, which reiterated its 'buy' rating on the stock.

Berenberg also noted that supply "remains tight" and that it believes could tighten further, supporting revenue per available room over the coming years.