Broker tips: Bodycote, Restaurant Group, Northgate

Bodycote got a boost on Friday after N+1 Singer upgraded the stock to ‘buy’ from ‘hold’ saying sentiment was likely to warm next year.

The broker cut its estimates to reflect the more challenging trading environment which was confirmed in the group’s third quarter update.

It downgraded its pre-tax profit and earnings per share forecasts by 10% for 2015 and 16% for 2016, saying this assumes a further weakening in the last months of this year and a 2.7% organic sales decline next year due to subdued end markets.

However, Singer expects sentiment to become more positive in the year ahead.

It pointed out that the shares are trading on a discount to the sector on consensus forecasts based on low expectations.

In addition, it said comparatives will begin to soften from the second quarter of next year, while management execution remains strong and the sales mix continues to benefit from faster growth by higher margin Specialist Technologies.

“Furthermore, the strong balance sheet would support a cash return or M&A,” said Singer, which cut its price target to 635p from 785p.

UBS initiated coverage of Restaurant Group at ‘buy’ with a price target of 860p.

The bank said it sees the company as a highly-attractive continuing roll-out story.

“Our bottom-up analysis of the market potential of the group's key brands shows that in an upside scenario, the group's expansion potential could be 4x Restaurant Group’s own targeted increase. This could support double-digit revenue growth for 18 years, assuming 2.5% LFL sales growth.”

UBS said the stock offers a high-quality growth story and management has a track record of delivering strong returns through value-creating new site additions.

The bank reckons a combination of management initiatives to continue driving volume, and a more favourable pricing environment, will see sustainable LFL sales growth going forward, following the average 2.6% LFL growth posted in 2011-14.

It also sees limited risk from wider market supply growth given that total restaurant numbers in the UK are declining, while the Restaurant Group’s predominantly out-of-town locations provide a controlled supply environment.

Berenberg upgraded Northgate from ‘sell’ to ‘hold’, citing the downside risk being priced into the stock.

It said over the last five months, the company has seen a 40% fall in its share price as “lacklustre end-market growth and new depreciation policies have weighed on top-line and margin development."

That has led the company to issue guidance of flat profit before tax for the next three years.

“As a result of this, combined with the fear of residual value deflation and an increasingly competitive landscape, it is unsurprising that the shares have seen a substantial pullback.”

With that in mind, Berenberg revised its target price down from 455p to 400p, but upgraded its rating.

“We…appreciate that the major downside risk it now priced into the valuation.”