Broker tips: Barratt Developments, Next, Johnson Service Group

Analysts at Canaccord Genuity nudged up their target price on residential property developer Barratt Developments from 625.0p to 630.0p on Thursday, stating the group's planned volume growth supported profit recovery.

Canaccord said Barratt's 2020 full-year results were "severely impacted" by the lockdown, with completions down roughly 30% and profits sharply lower.

However, the Canadian bank said Barratt had exited lockdown "in decent shape" - with its sites now open and operating at close to normal levels in terms of build rates.

Canaccord also highlighted that the firm had seen "very strong trading" in July and August, and even though it noted trading had "undoubtedly" been helped by pent-up demand, Help to Buy and the recent stamp duty cuts, the analysts still felt demand appeared to have some good traction amid reassuringly firm pricing.

"There are the obvious macro risks relating mainly to rising unemployment which cannot be ignored, but the market is so far proving to be remarkably resilient and looks tentatively encouraging," said Canaccord, which stood by its 'buy' rating on the group.

Morgan Stanley downgraded its rating on shares of Next on Thursday to ‘underweight’ from ‘equalweight’ arguing that the stock is "very overvalued", currently trading higher than it was a year ago, which it said "makes very little sense" given it’s been hit hard by the Covid-19 pandemic.

MS, which kept its price target at 3,650.0p, said even in its own upside scenario, Next revenues are likely to fall 18% this year and its profits more than halve. Although its debt will be down, its leverage will be up and it may need the covenant waiver it has agreed with its banks, Morgan Stanley said.

Despite these issues, the shares are now trading higher than they were last year, when there was no pandemic, the economic outlook was broadly stable and Next was on course to make £725m of profits and to return £500.0m of this to its shareholders.

"We were concerned even before the Covid-19 crisis about the underlying health of the business, and in particular its growing reliance on credit sales," the bank said. "We now see little scope for Next to return cash to shareholders or to grow EBIT margins on an underlying (i.e. Covid-19 disruption aside) basis.

"So we think the EPS growth 'algorithm' that has served Next so well for the last 20 years may now be broken."

Analysts at Barclays raised their target price on textile rental and workwear group Johnson Service Group to 175.0p on Thursday, labelling the firm more of an "iceberg" than a value trap.

Barclays said Johnson Service's value was mostly below the surface and while it acknowledged that it was unclear as to whether or not this would change on a twelve-month view, the analysts think the group was "far from a value trap".

The bank highlighted that stable pricing supported a margin recovery and stated that management could also add further value through the downturn.

"Therefore, we believe investors can confidently own it awaiting value to resurface with a HORECA (Hotels, Restaurants and Catering) upturn," said Barclays.

The analysts stated that given the group's pre-Covid track record of delivering more than 10% earnings per share growth via roughly 6% organic revenue, 2% organic margin expansion and bolt-ons, they think that with shares trading at around 12 times 2019 full-year net income, with only £200,000 of net debt, the stock looks cheap.

"We estimate current valuation only assumes HORECA recovers to a 7% EBIT margin <50% of FY19. We increase our PT to 175p on higher outer year estimates," the analysts concluded.