Broker tips: Greggs, Meggitt, StanChart

Peel Hunt initiated coverage of Greggs with a ‘buy’ rating and a 1,200p price target.

The brokerage highlighted four key reasons underpinning its recommendation. It argued there was further growth to come from the reinvigoration of the product offering and freshening up of Gregg’s estate, noting that menu refreshes and products such as the new coffee range generated over £1m in revenue per week in 2015.

Peel also pointed to further expansion opportunities from franchise openings and corporate stores in the UK and Ireland.

“Better cash returns, access to more expensive and previously inaccessible sites and high cash margins are just some of the benefits Greggs has received by pairing up with franchise partners,” it said.

The brokerage estimates that Greggs generates around 10% from franchise system sales, in the form of royalty fees and mark up on commissary sales. The third reason it mentioned was margin upside from improving store systems and processes.

Peel Hunt said the company has made efforts to improve its systems and processes, beginning with rationalising the bakery network and supply chain. Greggs paid out around £20m of special dividends in 2015 and going forward, the group is committed to a progressive dividend policy, meaning it currently trades on a yield of around 3%.

“We have not formally included special dividends in our forecasts but highlight the group should be in a position to return c£31m in FY2017 and FY2018, equating to 59p and 60p respectively in total dividends, assuming a £40m head room.”

The total dividend distribution – ordinary and special – would equate to a yield of around 6% in full year 2017.

“Even at our target price of 1,200p, this would be c5% dividend yield, compared with an average dividend yield of c2% against comparable peers.”

JP Morgan Cazenove has downgraded Meggitt from ‘neutral’ to ‘underweight’ as the company looked too expensive.

On Tuesday, the FTSE 250 aerospace and defence firm posted a small rise in 2015 pre-tax profit and lifted its dividend despite what it referred to as a challenging year.

For the year ended 31 December, it said statutory pre-tax profit nudged up 1% to £210.2m from £208.9m in 2014, as revenue grew 6% to £1.65bn.

JP Morgan Cazenove noted on Wednesday that the shares rallied 24% since October with no material change in the earnings outlook.

“This leaves MGGT looking expensive in our view and we downgrade the shares to Underweight,” it said.

“MGGT only expects to deliver low single digit growth in 2016, with no improvement in its EBITA margins.

However, it said the rating is relative to other aerospace and defence stocks where it saw share price upside potential of over 15% by December 2016 including BAE Systems and Cobham.

It followed the investment bank upgrading Rolls-Royce to ‘neutral’ from ‘underweight’ on Thursday, even though it said it looks more expensive than Meggitt.

However, JP Morgan Cazenove said there are some important differences in the equity stories, including Rolls-Royce’s Civil Aerospace profitability “almost certainly” at a cyclical low, whereas it believed it may not be the case for Meggitt.

It also believed many investors appear willing to value Rolls-Royce on earnings potential at the end of the decade.

Standard Chartered was under pressure for the second day running as Bank of America Merrill Lynch downgraded stock to ‘neutral’ from ‘buy’ and slashed the price target to 475p from 650p following its 2015 results.

Standard Chartered ended last year with a pre-tax loss of $1.5bn, implying a fourth quarter loss of $3.2bn.

Bank of America ML said the loss exceeded its estimate of $1.7bn for the quarter, which was dominated by the costs of a rapid implementation of the restructuring plan announced in November.

However, ML said the forward-looking conclusion was the shortfall in the top line.

Merrill said StanChart’s revenue for 2015 was $5bn short of what it and consensus expected this time in 2014.

“Unwinding the excesses of the post-2008 expansion in concentration, business breadth and risk appetite have proven materially harder than we anticipated,” Merrill said, as it cut its 2016-18 revenue forecasts a further 6%.

In the short term, Merrill expects the company’s balance sheet to continue to shrink.

It argued that lower commodity prices will also have a modest negative effect, although with commodity finance now more modestly scaled within the group, less than in 2015.

“And with capital markets relatively challenged in 1Q 16, client activity in both wholesale and retail could be impacted,” the bank said, adding that management did not make specific comments on first quarter trading in the results presentation.

Merrill said it now sees a 6% return on tangible equity in 2018, which is 200 basis points below StanChart’s aspirations.