Broker tips: Dunelm, Bodycote, Victoria

Homeware retailer Dunelm rallied on Monday after RBC Capital Markets upgraded its stance on the shares to 'outperform' from 'sector perform', saying the recent pullback provides a buying opportunity.

RBC noted the share price has come off around 20% in the past month on store closures and rotation out of so-called ‘Covid beneficiaries’.

"We think it provides a more attractive entry point to buy a growing, well-managed retailer with a range advantage and which is well placed to make further enhanced cash returns to shareholders," it said.

RBC, which has a 1,450.0p price target on the stock, said Dunelm has a strong balance sheet, with a net cash position of £156.0m as at 31 October and access to £175.0m of bank financing facilities and as such, sees potential for it to pay higher dividends.

The Canadian bank also said the fact that Dunelm operates at the value end of the market should serve it well given likely pressures on employment and consumer incomes.

JPMorgan Cazenove downgraded heat treatments supplier Bodycote on Monday to 'underweight' from 'neutral' and cut its price target 635.0p from 670.0p, arguing that near-term pressures will weigh on the stock.

"We believe Bodycote has been fundamentally improved by the current management team, reflected in a higher through-cycle margin, and we expect progress to continue in the coming years," JPM said. "However, we see the full delivery of this upside as longer-dated."

In the near term, JPM expects the shares to come under pressure from a slower-than-expected earnings recovery and the need for a consensus reset.

The bank cut its 2020/2021/2022 adjusted EBITA forecasts by 8%/15%/5% to a level "well below" standing consensus and said it prefers overweight-rated Melrose Industries for investors looking to play a recovery in the automotive/aerospace industry.

JPM noted that Bodycote’s third-quarter trading update confirmed trading remains under the cosh, with organic sales still declining more than 20% year-on-year.

Analysts at Berenberg hiked their target price on construction outfit Victoria from 330.0p to 770.0p on Monday, citing the group's "resilient" first-half performance and its plans for future mergers and acquisitions.

In a period "heavily affected" by Covid-19 and associated lockdowns, Berenberg pointed out that Victoria's revenues were only down 2% year-on-year at £305.5m, while adjusted underlying earnings were down just 10% £52.4m.

However, despite the smaller than expected declines, Victoria also managed to "modestly" lower net debt from the level seen at the end of March.

In addition to the Koch investment announced in recent weeks and the expectation of further a return to mergers and acquisitions in 2021, the German bank, which also reiterated its 'buy' rating on the stock, believes Victoria to be "well set for a bright 2021".