Broker tips: UK homebuilders, Restaurant Group, Greene King
(ShareCast News) - British Land is a bellwether of the UK real estate office and retail market but while rents and asset prices are likely to decline it's 34% discount is overdone, Deutsche Bank said, upgrading the shares to 'buy' and those of sector peer Derwent London to 'hold' from 'sell'.
In a note to clients on Monday that noted that the sector now trades on a 30% discount to net asset value as the market prices in 20%-plus falls in rents and asset prices, Deutsche also reiterated its 'overweight' rating on European retail-focused Hammerson and its 'sell' recommendation on Intu as its focus on UK shopping centres offers more exposure to the downturn.
Land Securities, kept on 'hold' as more defensively positioned than British Land, with gearing at 22%, average unexpired lease term the longest in the sector and low development exposure, is "arguably the closest UK stock to a bond-proxy".
LandSec management's 'patient and disciplined' mindset "would prove the correct strategy to adopt in the event of a major downturn, [but] we believe the market correction will be less severe and acquisition opportunities limited". It's target price was upped modestly to 1050p.
Deutsche property sector analysts concluded that rather than the market's seeming anticipation of 20%-plus decline, one of 15% is "more likely" and as interest rates remain modest and the pound is still weak, "the disconnect between the investment and equity market offers opportunities for stock investors with a medium-term horizon".
British Land is thought to offer the best risk/reward as recent asset sales at or above book value make its NAV discount seem attractive, leading to its target price being lifted to 660p versus Friday's close at 599p.
BLND's portfolio is now weighted towards the less volatile West End and analysts said the near-term development pipeline should add "meaningful portfolio income", while share buybacks are evidence of "good capital management".
London office rents are forecast to decline 15% over the next two years as excess supply in the capital runs at 1.3 times the long-run average, driving vacancies especially in the City and "a tapering of take-up as many firms look to delay expansion decisions or reduce floorspace - albeit we believe this risk is overestimated".
Derwent London, the office specialist, is lifted off its 'sell' rating and target price yanked up to 2,750p from 2000p as the group "has a strong track record of delivering through-the-cycle returns above its cost of capital".
It will be tough for Restaurant Group to deliver a sustained improvement in performance as cost and competition pressures continues to build, said Berenberg as it reiterated a 'sell' recommendation on the shares.
Recent results from the owner of Frankie & Benny's and Garfunkel's were upbeat as early-stage restructuring of the company led to a 2.2% decline in like-for-like sales in the first half of the year.
This was taken fairly well by the market but Berenberg noted that the company benefited from a number of external
tailwinds, the period only included a few weeks of the new lower priced menu at Frankie & Benny's and other brand repositioning still to take place.
"Therefore, with the tailwinds unlikely to be as significant during the remainder of the year and prices at Chiquito set to be reduced over the next few months, we think the decline in LFL sales could accelerate," analysts wrote, seeing a negative effect from lower prices well into 2018 too.
EBIT margin declined 260 basis points in the first six months of the year as negative LFL growth and a variety of external headwinds hit profitability, though management expects to invest the £10m of cost savings and more into price, products and marketing.
Downside risks are seen as cost pressures are likely to continue squeezing margins more significant in the second half, with the situation little changed next year.
Analysts at JP Morgan marked down their target price for shares of pub operator Greene King on anticipated lower sales growth at its main unit, Pub Company.
More specifically, they cut their fiscal year 2018 forecast for profits before tax by 4% to £260m, anticipating like-for-like growth of 0.1% at Pub Co., down from 1.7%.
Their fiscal year 2019 PBT forecast also came down, by 6% to £270m, based on LFL growth of 0.8% at that same unit, versus 1.5% before.
As a result, their target price for the shares was revised lower, from 750p to 650p, and their recommendation kept at 'neutral'.