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Analysts at Berenberg slashed their target price on aerospace and defence manufacturer Rolls-Royce from 890.0p to 270.0p on Friday but upped their rating on the firm from ‘hold’ to ‘buy’, stating nothing was priced in for a turnaround.
Berenberg said the market appears to have given up on Rolls-Royce, with the current share price implying negative value for its civil aerospace engine business.
“This is unjustified, in our view, and fails to reflect any improvement potential in a business that is at rock-bottom,” said the analysts.
The German bank said it saw a path to “materially higher” cash flows from 2022 and an “all-in” free cash flow yield of 10% in 2022 – rising to 27% in 2024, based on its below-guidance forecasts.
Berenberg also conceded that a weak interim operating result was always expected due to Covid-19 impacts but said given that write-downs, provisions and charges to close out excessive currency hedging would not repeat, it felt Rolls-Royce’s first-half was the group’s “low point”.
Jefferies upped its stance on shares of builders’ merchant Travis Perkins on Friday to ‘buy’ from ‘hold’ and lifted the price target to 1,439.0p from 1,206.0p, as it pointed to the potential for growth at Toolstation.
It said repair, maintenance and improvement has been the UK construction market with the strongest pick-up through Covid-19, which it sees as sustainable, at least for the mid-term.
Jefferies said real-time data shows demand to move home is now ahead of pre-pandemic levels, suggesting scope for higher housing transactions, a key lead indicator for RMI.
As people spend more time at home following the Covid-19 outbreak, it may also drive greater desire to invest in homes. With Travis Perkins deriving around 70% of sales from RMI, it is one of the best-placed stocks to benefit from this, the bank said.
“Travis Perkins’ share price has lagged peers, despite being the stock most clearly exposed to this trend,” Jefferies said. “New proprietary mapping work suggests significant long-term growth at Toolstation, a standout performer through the pandemic. We think valuing this division alone could double the upside implied by our price target.”
Citi initiated coverage on shares of security software vendor Avast on Friday with a ‘neutral’ recommendation.
The bank said that while the current business has attractive growth prospects, its analysis suggests the share price fully reflects the continued evolution of the group at its current trajectory.
“Although M&A could provide further upside we do not feel it appropriate to reflect this in our current target price of 550.0p per share,” Citi said.
The bank said that as net debt/EBITDA levels approach management’s target floor of 1.5x, speculation naturally rises regarding future capital deployments.
“This M&A speculation has left little room for further upside and implies that a significant proportion of short-term earnings enhancement from future corporate actions is already in the current share price,” said the analysts.
Royal Mail shares rallied on Friday after JPMorgan Cazenove upgraded its rating to ‘neutral’ from ‘underweight’.
It said that while the UK turnaround is far from certain, stronger short-run trading has at least bought some time, and should prevent a build-up of net debt.
“The CWU negotiations appear to be the main ongoing concern,” it said.
The bank said it has increased its forecasts “materially”, as it lifted its price target to 253.0p from 145.0p.
