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Goldman Sachs added these 2 stocks to its conviction list in June

Goldman Sachs announced the June update for its "European Conviction List - Directors’ Cut" report today, showcasing the latest top Buy-rated stock additions for the region.

More concretely, the bank’s analysts added Centrica (OTC:CPYYY) and Signify NV (AS:LIGHT) stocks to the curated list, while removing Veolia Environnement SA ADR (OTC:VEOEY).

For Centrica, a British energy and services company, analyst Ajay Patel argues there is a notable cash flow and return story at the stock that remains “underappreciated by the market.”

Patel believes the commodity prices have reached an inflection point, with the market stabilizing after a weak first quarter. He anticipates over 10% upside to 2024 consensus earnings, driven by the UK supply business, gas storage, and Centrica’s trading operations. This is expected to result in strong free cash flow generation, further enhanced by a working capital unwind.

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In the long term, Ajay expects Centrica to invest £2.9 billion in green-focused projects, which could notably shift towards a sustainable mix and downstream businesses, justifying a higher valuation multiple.

“As compared to FY 2022 these activities move up from being 54% of the overall group profits to being 80% by FY 2028,” the note writes.

Potential catalysts for the stock include the upcoming financial results for the first half of 2024 on July 25. Goldman believes the report “should provide the market with greater clarity on Centrica’s capital allocation and Ajay’s view of strong cash return to shareholders, with scope for the company to extend its current buyback program.”

Meanwhile, Dutch lighting company Signify NV also made its way to Goldman’s conviction list.

Analyst Daniela Costa is 12% and 19% above the consensus for the company’s expected adjusted EBITA in fiscal years 2025 and 2026, respectively, citing “idiosyncratic margin acceleration amid bottoming end-market destocking.”

To be more specific, Costa expects Signify’s €200 million fixed cost savings plan to impact margins from 2Q/3Q24, following a labor union agreement in April, reaching full effect by FY25/26.

Moreover, the analyst observes that inventory destocking in wholesale and retail channels is bottoming out, with early signs of demand improvement in the Consumer segment.

“While the near-term Construction outlook has been dampened by delayed rate cut expectations, leading indicators have bottomed, raising the likelihood of an inflection in 2025,” analysts said in the note.

“Our Construction analyst notes continued improvement in the EU lending survey, stabilizing mortgage applications and construction PMI new orders trending above the Nov-23 trough levels. Daniela argues Signify will be a key beneficiary of this inflection, given construction is the largest end market (c.76%) for this company.”

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