Broker tips: Morrisons, Barratt Developments, RPC Group

Credit Suisse bumped up its target price for Morrisons, telling clients that its shares deserved a premium valuation versus those of Tesco and Sainsbury's.

The Swiss broker reiterated its 'Neutral' recommendation on the shares while lifting its target price from 200p to 230p.

However, trading on 18.3 times' its estimate of future earnings the stock was already expensive on an absolute basis, which kept it from holding a more positive outlook.

Analyst Stewart McGuire highlighted the nearly complete change which the management team had undergone over the course of 2015, the fact that it had the best balance sheet in its sector, the most freehold property and the only pension plan (in his coverage universe) showing a surplus, not to mention operational improvements.

As regards his model, McGuire factored-in the higher depreciation and pension costs which management had already flagged, which would be offset by lower interest payments, its ongoing savings programme and reduced debt, all of which he "rolled forward" another year.

The analysts also raised his estimate for payrolls costs on account of the National Living Wage initiative, forecasting 0.7% growth in fiscal year 2018 like-for-likes.

He also assumed no inflation.

All of the above left his fiscal year 2018 estimate for profits before tax at £375m, down from £387m.

Worth noting, in fiscal year 2020 the National Living Wage would cut into PBT by -£65m, he said.

Another two "key" risks which were outside of the grocer's control were Aldi and Lidl's store roll-out plans and, in their view, going forward inflation would be more of a headwind, than a tailwind.

Shares in Tesco and Sainsbury were changing hands on fiscal year 2019 price-to-earnings multiples of 14.4 and 12, respectively.

Barratt Developments

Analysts at HSBC revised their target price on shares of Barratt Developments higher on the back of the company's better than expected margins and as it moved to belatedly clear stock in zones one and two in London.

Mark Howson, Matthew Lloyd and Rajesh Kumar said the homebuilder was now winning the 'race against the itself' to cut its exposure to an oversupplied market in central London, especially for units with more than 1,000 square feet.

Now, more than 92% of its London land bank was below £1m, HSBC said, and further progress on that front would boost sentiment, it believed.

"That said, the group’s exposure in this more difficult area is not yet cleared, and we await further progress from a company that doesn’t like to talk about this much. Further reducing the exposure will boost sentiment in our view," the analysts said.

Its 20.7% gross margins at the half-year stage had also outpaced its own forecasts calling for 18.1%, HSBC pointed out.

Revised guidance for a total 2017 dividend payout of 39.3p and 40.0p for 2018 meant the prospective dividend yield was over 7%.

"In a world thirsty for income, this is attractive."

On the downside, HSBC saw a risk of a 5% house price/10% volume decline in 2020 on the back of Brexit, althought it added that scenario need not happen.

"In simple terms, our consistent reason for this is to counter investor/our own concerns about a potentially tougher housing market post 2019e, and potential for a real incomes squeeze in Q4 ‘17," HSBC explained.

Yet even discounting those risks the target price was still revised from 543p to 598p and the recommendation raised to 'buy'.

RPC Group

Analysts at Berenberg said shares in RPC Group were arguably cheap, giving short shrift to criticism of the company's adjustments to its operating profits, or that it was overpaying for assets, amongst other issues.

RPC Group was a 'roll-up' story, it had always been so and it continued to be so, the broker said, with the packaging business buying rivals and extracting synergies from them.

Adjustments to its earnings before interest and taxes were not "particularly large or unusual" relative to the size of the acquisitions carried out.

Critics of the Northamptonshire-based company were also failing to take duly into account the positives from its aqcuisitions, including the generation of synergies, Berenberg said.

With the price for past acquisitions running at about seven times EBITDA, falling to five times' once all costs and synergies were considered, the company was not destroying value "en masse".

Furthermore, at present its shares were trading on EBITDA and EBIT multiples aking to those of DS Smith, implying that the premium for further M&A had been taken out as investors' confidence wavered.

"If RPC makes more acquisitions and creates more synergies, then arguably this is cheap. We do think, however, that management could increase the focus on quality of acquisition rather than quantity," Berenberg said.

The broker kept the shares at 'buy' with a 1,120p target price.