Broker tips: Travis Perkins, Burberry VP, Wizz Air, Ryanair, IAG

Deutsche Bank upgraded its recommendation on shares of builders’ merchant Travis Perkins to ‘buy’ from ‘hold’ on Wednesday, lifting the price target to 2,056p from 1,707p as it noted that trading remains strong.

“Travis continued to trade well in the second quarter (particularly in its core merchanting division) and the company has raised its 2021 operating profit guidance to ‘at least £300m’ (we raise our forecast from circa £235m to £303m).”

The bank said it was upping its rating and price target on the shares “notwithstanding yesterday’s strong move”. Travis Perkins rallied in Tuesday’s session after it upgraded its full-year profit guidance.

Deutsche said the demerger of Wickes – a very good retail business that shares limited synergies with Travis Perkins – and the sale of the plumbing & heating distribution business leaves the group focused on trade, enhancing its capital allocation abilities.

HSBC downgraded Burberry to ‘hold’ from ‘buy’ on Wednesday and cut the target price to 2,350p from 2,400p, saying it’s time to take a breather after a solid run.

The bank argued that the upcoming growth pickup and margin improvement beyond 2022 is well reflected after the recent re-rating.

“We believe Burberry is now well positioned to deliver on its mid-term plan of sales up by high single digits, implying an outperformance versus the luxury industry,” HSBC said. However, it pointed out the shares have risen 12% since the release of full-year earnings on 13 May and 24% year-to-date.

The stock is now just 3% below its pre Covid-19 peak of 2,329p reached on 17 January 2020.

“We believe the stock price already factors some upcoming positive catalysts such as the expected release of strong retail like-for-like in Q1 due on 16 July, which we forecast up 74% y-o-y or down 4% on a two-year stack, or broadly flat on a two-year stack excluding the high single-digit negative impact from the ongoing cut in mark-downs,” HSBC said.

Analysts at Berenberg initiated coverage on specialist equipment rental group VP at ‘buy’ on Wednesday, citing a “mispriced high-quality recovery story”.

Berenberg stated that when looking for investment opportunities, it likes to see – a long-term record of shareholder returns, strong and consistent returns on capital employed, consistent history of organic growth, an easy-to-understand business model, upside to future forecasts, and a low valuation.

The German bank admitted that finding a company that offers all the aforementioned attributes was “extremely rare”, but it believes VP was, in fact, one such example.

“VP is a circa £350.0m equipment rental business, focused on the specialist segments of the UK market, with a record of growing materially ahead of its end-market. With its longstanding management team and strong focus on ROACE (returns on average capital employed), the business has achieved an annualised TSR of over 17% over the past 20 years,” said the analysts.

Berenberg noted that in spite of this, and the fact that the business exited March 2021 trading at 95% of pre-Covid levels, VP was currently trading 14% below its pre-pandemic share price, and at a potentially single-digit price-to-earnings ratio.

“We consider this a material mispricing, and expect VP to significantly outperform over the short and longer-term,” concluded the analysts, who also issued the stock with a 1,310.0p price target, implying a 47% upside.

Citi recommends investors tread more carefully in the European airlines sector given the changed landscape in the wake of the pandemic, with the recovery path for the various carriers also likely to vary.

On the plus side, the pandemic had forced companies to rationalise supply, which might result in greater pricing power in coming years, the broker added.

However, industry costs were facing structural headwinds including from environmental and route charges.

“Against this mixed backdrop, we believe investors should spread their wings across low cost and legacy carriers for winners,” Citi said.

The analysts said that they preferred Ryanair and Wizz Air in the low-cost segment and IAG among the legacy carriers.

Nevertheless, they did upgrade easyJet to ‘neutral’, arguing that it would benefit from the retrenchment of AF-KLM and Lufthansa.

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