Broker tips: Bunzl, Cairn Energy, Intertek

Jefferies downgraded its recommendation and target price on Bunzl due to concerns about momentum in the company's core margins and declining returns.

That led analysts Will Kirkness and Kean Marden to lower their target price for the shares from 2,230p to 1,950p and to lower their recommendation from 'hold' to 'underperform'.

Mergers and acquistions and increased penetration of its own-brand products had masked pressure on the distribution and outsourcing company's core margins, they said.

Assuming acquired margins of between 10% to 11%, they estimated the underlying business had seen a deterioration of between 20 to 30 basis points over the past two years.

Recent M&A, especially into segments such as safety, had also pushed the firm into more cyclical end markets.

Meanwhile, increased own-label penetration was a headwind to organic growth, although the broker estimate that since 2010 it had boosted margins by 50 basis points.

Environmental regulation was also a concern, Jefferies said, amid concern with a war on non-recyclable single-use products.

"To avoid margin deterioration and keep the top line ticking, current capital allocation needs to be sustained," they said.

Analysts at Macquarie revised their target price on shares of Cairn Energy higher in anticipation of progress in Senegal and the start of cash flow generation in the North Sea.

The Australian broker said it was hopeful that full data from an interference test at its Senegal operations would yield an uplift to the estimated recoverable resource volumes, adding 9.0p to its valuation of the shares.

"The current 470 mmboe 2C resource estimate assumes a lower level of recoverability in these reservoirs, which could be increased if waterflooding could be used in a higher proportion than currently being modelled," analysts Kate Sloan, Iain Reid and Giaccomo Romeo said in a research note sent to clients.

Those results were expected to be announced alongside the company's interims in August.

In parallel, Kraken was expected to come onstream over the next six weeks and to reach plateau over the following few months (15,000 barrels of oil per day), while first oil at Catcher (10,000 b/d to Cairn) was targeted for December 2017.

Intertek got a boost on Monday as Kepler Cheuvreux lifted the stock to ‘buy’ from ‘hold’ and raised the price target to 4,600p from 3,935p ahead of the first-quarter results on 26 May.

“We are bullish on the testing, inspection and certification sector’s cyclical inflection, which Intertek’s management is poised to leverage via acquisitions and gradual productivity improvements from its 5x5 strategic initiatives.”

Kepler expects Intertek to report sales of £878m, a 13.5% year-on-year increase, including a 1% rise on an organic basis. It added that forex should remain strong in the first quarter and estimated an M&A contribution of 1.5%. It said the company’s 5x5 strategic initiatives are delivering quick results, allowing Intertek to free up cash that chief executive André Lacroix has promised to redeploy into earnings-accretive acquisitions.