Broker tips: Barclays, Melrose, Electrocomponents

Exane BNP Paribas upgraded Barclays to ‘outperform’ from ‘neutral’ and lifted the price target 19% to 220p, having already upped the stock two weeks ago, saying things were looking brighter and the fog is lifting.

Exane said Barclays’ decision to cut the dividend and sell the African operations – announced in February – largely addresses the equity issue and gives more flexibility to improve efficiency in its capital base.

In addition, it said the earnings uplift as securities are extinguished is no longer a distant prospect.

Exane said it is now confident Barclays can boost earnings by about 20% and improve return on tangible equity by up to 2 percentage points over the next few years through debt restructuring alone.

UBS downgraded Melrose Industries to ‘neutral’ from ‘buy’ with an unchanged price target of 385p following the recent strong performance, saying the next deal is more reflected in the price.

The Swiss bank noted Melrose is up 33% year-to-date, outperforming its UK engineering coverage by 25% YTD. As a result, it has reached UBS’s target price.

“Melrose operates an unusual ‘buy, improve, sell’ business model and the current leverage to any future deal upside is high given the small nature of the continuing group.

“This is being factored into the share price today - we estimate that a c£2bn deal on which management double equity over 3-4 years is now being priced in.”

RBC Capital Markets upgraded Electrocomponents to ‘sector perform’ from ‘underperform’ and lifted the price target to 270p from 185p, saying downside is limited.

The Canadian bank pointed out that full-year results were around 3% ahead of its forecasts, with a better performance on cost savings.

It also said cash flow was better, with a good working capital, while it was encouraging to see second-half earnings before interest, tax and amortisation margin was up 70 basis points.