Broker tips: Bodycote, NatWest, Lloyds, National Grid

RBC Capital Markets has upgraded its rating Bodycote following recent weakness in the share price, saying that the stock looks "attractive value" in spite of end-market headwinds.

The broker lifted its position on the stock from 'sector perform' to 'outperform', but cut its target for the shares from 720.0p to 700.0p.

RBC highlighted that the share price of the heat treatment and thermal processing services provider has dropped by 21% over the past three months alone, compared with the wider sector which has gained 2%.

"There are trading headwinds with pressures in auto, aerospace and defence, and general industrial - this prompts us to cut our 2024/2025 EPS forecasts by 5-6%," the broker said, but noted that end markets should improve in 2025.

RBC said that an upcoming company event in December could be a "positive catalyst" for the stock, with new chief executive Jim Fairbairn, who took over in May, hosting his first capital markets day on 12 December.

"Even on reduced forecasts the share looks attractive value, and with margins still below pre-Covid levels and a new CEO set to host a December CMD that could point to incremental self-help, we see this as an attractive entry point."

Jefferies has upgraded its recommendation for NatWest from 'underperform' to 'buy', but still rates Lloyds as its preferred stock in the UK banking sector.

In a research note on UK-listed domestic banks on Tuesday, Jefferies turned more positive on NatWest, reiterated 'buy' calls on Lloyds, Barclays and OSB, but downgraded Paragon Banking from 'buy' to 'hold'.

"Domestic bank structural hedges still receive 1.7% on the fixed leg versus a pay floating leg of 5%. It depresses sector profit by £11bn and ROTE by 15pp, with the MTM on associated swaps compressing TNAV by 9%. Much of this will unwind by mid-2027 providing a multi-faceted boost to financial statements," the broker said.

As for its preferred pick Lloyds, Jefferies said "2025 could be its year". The broker estimates that the mis-selling of car finance redress will be capped at £1.0bn, while TNAV will "accelerate hard given the largest CFH reserve unwind in the sector". Moreover, "the hedge should ignite in 2026", the broker added.

Analysts at Berenberg lowered their target price on utilities giant National Grid from 1,150.0p to 1,070.0p on Tuesday, stating the group would now be forced to deliver "a balancing act".

Berenberg, which stood by its 'hold' rating on the stock, said National Grid's five-year £60.0bn capex plan demonstrates the "unequivocal need" for network investments to underpin the energy transition.

"However, we think that a balancing act is required between investment obligations, leverage and shareholder returns, which is further complicated by some regulatory unknowns," said Berenberg.

Berenberg said the regulatory backdrop in the UK and US was generally supportive, acknowledging the magnitude of investment that was required, but it still thinks that some pieces of the puzzle were missing - for example, UK regulator Ofgem's transmission price controls, which were due to be finalised in December 2025.

"Those missing pieces are important, particularly when considering our expectation that National Grid's leverage will rise back towards its pre-rights issue (2023/24) level during the course of its five-year plan," said the German bank.

"Therefore, in our view, unless Ofgem's regulatory settlement is better than expected, National Grid's leverage looks set to limit its dividend growth to the rate of inflation for the foreseeable future, muting its shareholders' participation in the group's expected five-year 10% asset CAGR and 6% EPS CAGR."