Broker tips: Ferguson, NatWest, BT Group

by | May 20, 2021

Analysts at Canaccord Genuity raised their target price on plumbing and heating products distributor Ferguson from 9,100.0p to 10,000.0p on Thursday, stating “temporary positives” had amplified an already “strong” performance.

Canaccord said Ferguson had reported a very strong set of unscheduled third-quarter results, with the firm enjoying strengthening demand as the US economy reopened with new housing strong, repair, maintenance, and improvement work growing as access to people’s homes improved, and commercial units like education and hospitality being revived.

“Combined with good demand, the group is seeing acute inflation feeding through to finished goods and against a backdrop of tight supply it successfully passed on inflation of circa +5% in Q3 in the US,” noted Canaccord, which also reiterated its ‘hold’ rating on the stock.

“Gross margins saw a 110bps boost and good operational cost control resulted in very strong margins. Cash performance has also been strong with the group paying out the special dividend and making good progress buying back shares during the quarter.”

The Canadian bank also noted that with only one quarter of the current financial year remaining, visibility over full-year profits was “relatively good”, with management “substantially” increasing its trading profit guidance as a result.

RBC Capital Markets upgraded NatWest to ‘outperform’ from ‘sector perform’ on Thursday and lifted its price target to 240p from 190p, implying around 20% upside to the current share price.

RBC said valuation multiples do not take into account the bank’s “superior” three-year total return yield of 34% versus 20% for peers.

“We are 10% above consensus for shareholder capital return between 2021 and 2023,” it said. In addition, it noted the potential for book value and earnings upgrades from write-backs and a steeper yield curve.

Analysts at Berenberg downgraded telecommunications giant BT Group from ‘buy’ to ‘hold’ on Thursday, stating the firm’s shares had “materially rerated” since upgrading the stock back in August 2020.

Berenberg highlighted that BT’s share price had increased 75% since the upgrade, outperforming the STOXX Europe 600 telecommunications index by 50%, and after a busy first-half to the calendar year, with lots of events to cause the rerating, its analysts do not believe that there were as many positive catalysts to come.

“As such, we struggle to justify putting BT’s investment case ahead of others, in a sector that offers many ‘cheap’ stocks,” said Berenberg, which did raise its target price on the stock from £1.65 per share to £1.75 each.

The German bank pointed to four reasons to now adopt a “more cautious stance” on BT. Firstly, it said BT had “challenging guidance” for the next two years, particularly its “at least £7.9bn” in underlying earnings in 2022/23, meaning that prospects for any material “beat and guidance raise” were limited.

Secondly, it said the merger of Virgin Media and O2 UK, due to complete in coming weeks, may increase investor concerns around the long-term threat of overbuild. It also stated the outcome of ongoing talks between BT and the Communications Workers Union remained uncertain, but noted it would not be surprised by either an agreement that was presented in such a way as to appear to limit cost-cutting, or alternatively, by increased strike action.

Lastly, Berenberg acknowledged that Ofcom was due to publish a consultation later in the quarter on annual licence fees for the 2100-megahertz spectrum.

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