Broker tips: Berkeley Group, Rolls Royce, Ocado

Analysts at Berenberg hiked their target price of Berkeley Group from 3,280p to 3,480p, complimenting the strength of the property developer's balance sheet and its ability to deliver strong results in a "soggy" sales market, but told clients there were better pickings to be had elsewhere.

In a research note sent to clients, the broker argued that the group’s operating model and expertise, focused on longer-term regeneration sites with a bias towards operational risk - as opposed to financial risk - had ensured sector-leading returns over the long-term.

"However, with the London market showing no signs of a rapid recovery, returns will continue to revert to mean, and we think there are better opportunities elsewhere," they cautioned.

While Berkeley’s FY 2019 numbers came in 9% ahead of consensus (boosted by the transition to IFRS 15), the analysts cut their estiamte for profits before tax in 2020 by approximately 4%, but boosted expectations for 2021 by 7% as volumes are expected to recover in the latter year, leaving overall forecasts over the two-year period in line with consensus.

Factors such as affordability, tax changes, stamp duty and Brexit have contributed to a slower London sales market so that Berkeley was now transitioning away from a period of super-normal profitability.

Hence, the company's operating margins were mean reverting to approximately 20% in the medium term.

Against that backdrop, the analysts praised management taking steps to de-risk the balance sheet.

Analysts at JP Morgan reiterated their 'underweight' recommendation on shares of Rolls Royce, pointing to a weakening market for wide body jets and the European Union's drive to reduce the hit to the environment from aviation.

The latter, they said, left the engineer's guidance on research and development looking "unrealistic".

"We do not believe this is realistic given the rapidly changing views of regulators and the public regarding the environmental impact of aviation. Moreover, as the least profitable aero engine company, RR’s profits face the greatest % hit from upward pressure on R&D," they said to clients in a research note.

Rolls Royce was guiding at the time towards a decline in R&D spend as a proportion of sales through to 2024.

"We return from the Paris Air Show (PAS) with significantly increased conviction in our UW rating on RR," JP Morgan said.

On its estimates, consensus forecasts for earnings per share in 2020 and 2021 looked about 20% too high.

It also cautioned that Airbus's upcoming launch of its A321 XLR would "cannibalise" the bottom end of the wide body market.

Shares of grocery delivery company Ocado rallied on Friday as Citi upped its price target on the stock to 1,450p from 1,300p and reiterated its 'buy' rating.

"We reiterate our buy rating with our view that Ocado leads in a global online grocery market experiencing secular and structural growth," Citi said.

"Moreover the advent of the Ocado Zoom immediacy solution (less than one hour deliveries) significantly increases its addressable market, with the opportunity for greater automation (notably outbound robopicking) underpinning its long term economics," the bank added.

Citi said that Ocado Zoom, which is designed to deliver groceries to customers within a one-hour window, doubles the addressable market.