Broker tips: Meggitt, Reckitt Benckiser, Page Group

Engineer Meggitt got a boost on Wednesday as Bank of America Merrill Lynch upgraded the stock to 'buy' from 'neutral' and lifted the price target to 530p from 490p.

The bank said it sees an attractive cash improvement story through to 2020, driven by gradual margin improvement and stabilisation in fixed/tangible investment.

Merrill said it sees around £304m of free cash flow to equity in 2020, which would correspond to an 8.7% free cash flow yield, which it reckons is attractive versus the civil aerospace peer group average of 7% in 2020.

The bank also pointed to the fact that aftermarket growth is improving, driving the potential for a re-rating.

"Following years of weak and volatile aftermarket growth, Meggitt introduced the Customer Services and Support (CSS) organisation in 2015. Management highlighted that this contributed positively to aftermarket growth for FY16, seeing 5.4% aftermarket growth versus market growth of 3.4%, after making good progress in limiting the headwind from surplus parts and increasing share of Maintenance, Repair and Overhaul activities."

Boa ML said if the new organization can continue to drive strong aftermarket performance, as demonstrated in 2015, versus years of volatility, this could drive a re-rating in the mid-term.

Reckitt Benckiser

Berenberg sounded a confident note on the prospects for Reckitt Benckiser in 2017, telling clients it expected to see a steady improvement in the company's like-for-likes throughout the year, with trading at its recently acquired US rival Mead also likely to improve.

Hence, the analysts judged that the market concerns on both those fronts which had been weighing on the shares would be adressed in short order.

That led them to reiterate their 'buy' recommendation and 8,500 target price on the shares.

The broker also noted how stock in the consumer goods giant was trading at a 10% discount to its sector peers in terms of its estimated 2018 price-to-earnings multiple and free cash flow yields (including Mead), despite the potential for it to deliver total shareholder returns of roughly 40% over the next two years.

Reckitt itself was still grappling with the same headwinds facing all its competitors, a late Easter and India's demonetisation gambit. On top of that, the loss of sales in South Korea and the failed Scholl innovation would hurt comparatives in the first three months of 2017.

Yet by the backalf of this year top-line growth would again be running at 5%, boosting full-year growth in its like-for-likes to 4%.

As for Mead, North America and Europe were expected to weigh on Mead's performance until at least the third quarter of 2017.

However, trade investments in China were seen stabilising in the second half while Latin America should improve starting from the first quarter, Berenberg said.

The US would also stabilise eventually for Mead, the broker added, congratulating Reckitt for the good timing on the acquisition.

"We think the deal is well timed for Reckitt, coming when Mead was actively seeking a buyer to address its scale issues and d the probability of a counter.

Page Group

HSBC hiked its target price for Page Group shares sharply higher and reiterated its 'buy' recommendation as the company's bottom line growth above its own estimates forced the broker to concede that it may have been to "conservative".

On top of that, HSBC reiterated its long-held view that the specialist recruiter's capital discipline justified a higher multiple for its shares than for those of its peers.

"Our case for Page Group has been that even in slow growth the capital discipline warrants better market relative multiples, and growth could be better. We have not changed that view, but these results do suggest that growth may be stronger than we had, conservatively, assumed," HSBC said.

Page Group's gross profit growth rebounded to 9.1% for the first quarter of 2017, from -3.8% in the last three months of 2016.

The broker also highlighted how gross profit growth in the UK had improved from down 6.5% year-on-year in the final three months of last year to flat in the first three months of this year.

Client spend with Page Group had improved in March with the approval of corporate clients' new budgets.

Nonetheless, investors would be wise to stay cautious because the timing of Easter likely impacted on its profit growth and the business climate continued to be "considerably uncertain", HSBC said.

"There remains some considerable uncertainty around Brexit, European elections and the emergent policies of a new US administration. How these factors may affect labour market demand is a risk."

Even so, the broker raised its estimate for the company's gross profit growth at constant currencies in 2017 from -0.4% to 4.8%.

It also lifted its 2017 estimate for Page Group's earnings before interest, taxes and amortisation from £87m to £108m.

As a result of those revisions the target price went from 490p to 603p for an unchanged 2017 price to earnings multiple of 24 times HSBC's estimated 25.1p of EPS for the company.