Broker tips: Bellway, Savills, Merlin Entertainments, Sky, oil companies, Severn Trent

Peel Hunt upgraded Bellway to 'add' from 'hold' and went the other way on Savills as it took a look at UK housebuilders and estate agents.

Peel said it remains positive about the outlook for London-listed housebuilders and their share prices. As far as estate agents are concerned, it said the traditional players are faced with low market volumes and a structural shift towards different formats.

The brokerage lifted its price target on Bellway to 3,145p from 2.925p, noting the stock has delivered a pre-tax profit compound annual growth rate of around 53% over the last three years, compared to a sector average of 33%.

"Looking ahead, with a steady economic backdrop, new outlet openings should drive volumes and profits higher again," it said, adding that it forecasts average net asset value growth and a dividend yield of around 19% over the next two years.

Peel said Savills' results for 2016 were better than expected, aided in part by FX and better results in Asia and the UK than anticipated. The brokerage upped its price target on the stock to 910p from 750p to reflect higher forecasts and the rolling forward of its multiples to June 2018.

However, it said the shares don't offer much value after a strong run in the last few months, hence the downgrade.

Peel Hunt said buy-rated Berkeley Group was one of its top picks. Concerns about London will probably limit the stock's short-term performance, but the brokerage said it remains confident there is "great" long-term value in the current share price.

More broadly, Peel said investors should watch out for the election, which will bring with it new manifestos and therefore promises about housing supply and other issues from the mainstream parties.

"While manifestos promises are frequently ignored or diluted, they should give more evidence of the direction of travel on political attitudes towards the housing market."

Merlin Entertainments

The plan by Merlin Entertainments to add hotels to their theme parks is underappreciated by the market, said Morgan Stanley on Wednesday as it set a bullish share price target for the years ahead.

Adding hotels to theme parks increases the visitor catchment area, revenue visibility, ancillary revenues, trading periods and guest satisfaction, Morgan Stanley gushed, with themed hotels such as Lego rooms at its Legoland parks providing an "immersive" family experiences and premium revenues.

Its analysis suggests around £450 revenue per room per night, which is three to four times higher than the market average, with management's ambitious target to increase the current 3,600 rooms by 2,000 by 2020.

With an average of 400 at its large parks being well short of the 1,000 at some competitors, Morgan Stanley sees 7,000 rooms by 2022, with hotels growing to 30% of adjusted operating profits, adding 5% to the annual group number.

Analysts calculated that earnings per share, which came in at 19.56p and are forecast at 22p for 2017, with continuing strong London hotel and visitor statistics expected to help Midway performance this year, could reach 50p by 2022.

A target price of 580p was set, with the bull case putting a 1,000p share price based on a forward multiple of around 20 times.

Sky

Jefferies has upgraded Sky to ‘buy’ from ‘hold’ and hiked its price target to 1,200p from 1,050p as it believes the broadcaster is “materially” undervalued with or without the potential £11.7bn merger with Fox.

Sky is currently trading between 9-10% below the Fox offer recommended last December, and while this suggests there would be a risk of the deal failing, Jefferies believes that UK approval prospects are favourable.

The broker said this supports its new 1,200p target price and suggests that shareholders could hold out for a better offer.

Ofcom's wholesale local access consultation proposed tough charge controls on BT’s Openreach, creating a potential £130-140m saving for Sky by 2020/21. Narrowing costs of wholesale access to fibre and digital subscriber line will also enable Sky to re-focus on converting TV homes to triple play.

Meanwhile, the broker said that free cash flow downgrades at BT leaves it more dependent on raising retail prices, which should benefit Sky.

Jefferies is confident that the deal will be approved by the government without remedies or referral to the Competition and Markets Authority as it does not detect appetite among competitors, Ofcom or the government to override precedents.

It said that previous public interest reviews have established four core principles: that news is the sole genre of importance in assessing plurality, plurality was sufficient after Sky acquired a 17.9% stake in ITV, there is clear distinction in scope for coordinating editorial control between instances where assets are under common ownership and common control due to material influence, and that significance can be attached to safeguards from assets being held in separate public companies with independent shareholders.

Ofcom’s report on the deal has been pushed back to 20 June due to the 8 June general election, after the government said the 16 May deadline was too close to polling day.

Culture Secretary Karen Bradley has also asked the CMA to report on potential jurisdictional issues related the deal, which was cleared by the European Commission earlier this month.

Next

Jefferies downgraded retailer Next to 'underperform' from 'hold', keeping the price target at 3,500p.

The bank noted Next's share price has rallied 13% in recent weeks and warm weather aside, it reckons the company's challenge to regain its competitive edge and overcome a shift to leisure spending is as tough as ever.

Jefferies said the dividend yield of around 8% is an attraction, but it forecasts a near 20% decline in pre-tax profit for FY17-19, below consensus, hence the downgrade.

"We believe a late Easter and 'the fifth warmest March since 1910' will have helped UK clothing sales but rising inflation, weak UK consumer confidence (-6% in March) and the shift to leisure spending are offsetting factors."

Jefferies said that results from its February consumer survey showed that Next's net promoter score had fallen to 19%, below Marks & Spencer and Debenhams for the first time, and down from 32% 18 months ago.

"As a result Next has fallen from 3rd to 11th position in our NPS league table. So with planned improvements to the clothing ranges and multi-channel offer not fully coming through until Christmas and beyond, and competitors continuing to invest and improve, we expect it will take time for Next to get back on track."

Oil companies

Analysts at Canaccord Genuity highlighted the favourable prospects for junior oil explorers Rockhopper and Eland Oil&Gas.

The challenges facing Falklands-focused Roockhopper in finding a partner for its Sea Lion project should not be "underestimated", analysts Alex Brooks and Charlie Sharp said in a research note sent to clients.

Nonetheless, assigning a 10.0% 'chance-of-success', as the market currently does, is "too tough", they surmised.

Meanwhile, Eland's bedding-in of the new shipping export route means it no longer needs to rely on the Forcados terminal alone, underpinning the stock's value and reducing risk.

Both Rockhopper and Eland were upgraded to a 'Buy' the day before.

As an aside, following Delek's approach for Ithaca Energy, the analysts believe Faroe Petroleum is the "next obvious candidate".

"It seems unlikely that Delek would see Ithaca alone as providing enough North Sea scale."

Thus, within the exploration and production sector the broker says the best value lies in Rockhopper and Gulf Keystone.

Among integrateds, it still prefers BP over Total and Shell, with latter still over-indebted in their opinion.

In the services space it favours Wood Group/Amec, continues to be positive on Lamprell - owing to the potential for a recovery and Saudi upside - while Cape is "attractively valued". Canaccord also "likes" SBM Offshore as new projects get going.

Severn Trent

Analysts at HSBC downgraded their recommendation on shares of Severn Trent in view of the regulator's new push for the sector to increase its 'resilience', which in the case of Coventry-based Severn meant roughly £230m of additional capital outlays.

With the advent of the 2014 Water Act, Ofwat's chief duty will be to ensure that the companies under its remit have the ability to recover from "disruptions" and to anticipate trend changes so it can continue to maintain services and protect the natural environment.

Simply put, water companies and the regulator's overriding priority now is to avoid any potential for scarcity of water supplies on a sustainable basis.

That has important implications for Severn, which HSBC judges will not be able to continue to abstract water at the current rate, which will require up to £230m of investment in new sources.

On top of that, Severn's 'financial resilience' is less than its peers, HSBC said, "noting" the pension repair contributions announced alongside its first half numbers.

Hence, HSBC downgrades Severn from 'hold' to 'reduce' and cut its target price from 2,330p to 2,200p.

Nonetheless, for the UK Water sector as a whole Ofwat's PR19 Price Review may provide an opportunity for accelerated investment by all companies, particularly Severn, which sports the largest regulated asset base to 2020, the analysts said.

As an aside, HSBC indicates that Pennon and United Utilities have "manageable" water resilience issues, with the latter especially having demonstrated both water resilience as well as high high levels of financial resilience.

Pennon and United were kept at a 'buy', with the broker nudging its target for the latter from 1,060p to 1,070p.