Broker tips: CRH, Cranswick, Rotork

The gloom hanging over emerging markets might be lifting on a 'tactical' basis, but the poor outlook for cement prices in that geography was set to drive a wedge between European building materials firms exposed to them versus those with a greater relative footprint in the US and Europe, JP Morgan said.

Following on from the above, analysts Elodie Rall, Rajesh Patki, Emily Biddulph and David Min upgraded their recommendation on shares of CRH from ‘neutral’ to ‘overweight’ and lifted their target price from €26.0 to €29.0.

In the same research note, they started coverage Travis Perkins and Wolseley at ‘overweight’ and placed target prices on each one of them of 2,400p and 4,300p, respectively.

However, on SIG JP Morgan moved from a target of 150p to 140p, albeit while keeping its recommendation at ‘neutral’.

Cement prices in most EM’s showed quarter-on-quarter deterioration over the last three months of the year, JP Morgan pointed out.

Hence, it moved to cut profit estimates for the sector and marked-to-market its forecasts to take into account movements in foreign exchange markets.

Even after those revisions – and after having outperformed the market year-to-date - the sector was still trading on 8.2 times the broker’s estimates for firms’ enterprise value over earnings before interest, taxes, depreciation and amortisation (EV/EBITDA).

That EV/EBITDA multiple was 16% higher than the historical average.

As a result, JP Morgan told clients to take profits in Heidelberg Cement and took its recommendation on the stock down a peg, from ‘overweight’ to ‘neutral’, while trimming its target price from €83.0 to €79.0.

“We would play the sector through CRH (OW),St.Gobain (OW) and Wolseley (OW) overHeidelbergCement (N) and Lafarge Holcim (N) for the large caps.”

Cranswick’s target price was lifted by Numis to 2,202p from 1,900p after the food producer reported a pre-close trading update.

The company said on Tuesday that it will report a trading performance for the year to the end of March in line with its expectations following continued positive trading in the final quarter of the year.

Cranswick, which is due to release its full year results on 24 May, said total full year sales volumes were 12% higher than the previous year.

Full year underlying sales volumes rose 10%, with corresponding revenues up 5% as customers and UK consumers benefited from lower pork prices.

“The impression gained post the third quarter update was that there was a desire to sustain the 10% like-for-like increase for volume for the entire full year, despite the tougher comparative in the fourth quarter. This has been achieved, with the exit run rate indicated to have been good too,” Numis said.

Cranswick said it invested well in excess of £30m across its asset base in the last financial year to support future growth and drive further operating efficiencies – a level of investment that is expected to continue through the current year.

The company said it was “in a strong financial position”, with committed, unsecured facilities of £120m “which provide comfortable headroom”.

“The shares trade on a far higher than usual rating, so good news was discounted and we are projecting pre-tax profit of £69.8m for this full year” whereas as per Fidessa most estimates are in the £66.4-68.1m range,” Numis said.

“Low pig meat prices may not last forever too, although this is a strongly-managed concern with a 25- year dividend growth record and a history of successful ‘buy and build’ deals.”

Numis reiterated it's 'hold' rating for the stocks.

Cuts to capital expenditure budgets in the Oil&Gas space had only just begun and were beginning to filter through from the ‘upstream’ segment into Mid and Downstream activities, Morgan Stanley said.

There had been about $90bn of recent deferrals announced, the broker pointed out.

Indeed, Morgan Stanley’s proprietary capex tracker was pointing to about a 20% year-on-year fall in mid/downstream spend in 2016 – for the first time ever.

For that reason, the analyst team led by Robert J.Davies downgraded its recommendation on shares of Rotork to ‘underweight’ and cut its target to 155p while cautioning clients that shares in capital goods manufacturers were now more exposed to downside risk.

Stocks in the oil services patch were trading at about a 20% discount to their historical troughs on a price-to-book value basis, whereas Morgan Stanley’s engineering universe was still trading on approximately a 55.0% premium.

“CapGoods’ PE valuation have reverted to levels consistent with approximately $100 oil,” Davies and his team said in a research note sent to clients.

Morgan Stanley also reiterated its underweight stance on shares of Alfa Laval, Smiths, andMetso, but remained at equal-weight on IMI, although it reduced its target price to 960p.

The broker also stuck to its equal-weight view on upstream-exposed Weir, highlighting its preference for the shares as compared to IMI, Rotork and Smiths as its earnings revisions had already been much higher – at about 60.0% - and the analyst consensus was already just for 'break-even' for the company’s Oil&Gas margins as opposed to about 20% at the likes of Rotork orSmiths.

“Even if oil rallies we see limited benefits for CapGoods stocks relative to Oil Services.”