Broker tips: Drax, Stagecoach, Micro Focus

Drax surged on Friday as Barclays upgraded the stock to ‘overweight’ from ‘equalweight’ and lifted the price target to 410p from 400p saying post-results weakness was unjustified.

It noted the shares have dropped 20% since the mid-February results, underperforming the Stoxx Europe 600 utilities index by 24%, seemingly “on little more than disappointment that Drax didn’t immediately announce a new higher dividend policy”, but instead said it would consult with shareholders over 1H17.

“We understand Drax’s consultation is a genuine attempt to balance priorities of growth capex and increased returns to shareholders. We thus see no justification for the scale of Drax’s recent share price reversion, and upgrade,” the bank said.

In addition, Barclays argued that post-results regulatory changes and acquisitions are positives.

Analysts at HSBC downgraded their recommendation and lowered their target price on shares of Stagecoach, in light of the company's "high levels" of off-balance sheet debt together with continued concerns around its rail franchise and UK bus operations.

The recommendation was taken down a notch from 'Hold' to 'Reduce' and the target price was cut from 205.0p to 200.0p.

HSBC's specific concerns around Stagecoach are on top of the sector's shared woes of high variability in companies' earnings streams and continued "difficult" trading conditions, with the best opportunities probably to be had overseas.

"In summary, it’s simple: The UK is a difficult market and the best opportunities for operators appear to be abroad. New rail franchises may offer opportunities, but existing ones are a risk," the analysts said.

Deutsche Bank initiated coverage of Micro Focus International at ‘buy’ with a 2,900p price target.

DB noted the company’s strategy is to acquire mature software assets at attractive valuations with significant scope for operational and cost improvement.

It said Micro Focus has refined its approach over the past 10 years and intends to maintain its focus on leveraged inorganic growth for the foreseeable future.

“We believe the current share price applies a conservative discount to the proposed synergies from the HP Software deal and forecast a 13% earnings per share compound annual growth rate FY17-20, normalising to 6% thereafter, supported by a low-mid single digit % dividend yield.”