Broker tips: Persimmon, Restaurant Group, Cobham

UK housebuilding shares have fallen 25% since Britain voted to leave the European Union and the sector has priced in a 5% drop in house prices, J.P. Morgan Cazenove said on Monday

“However, while we think it’s prudent to assume that transaction numbers will fall during 2017 (although trends have been solid so far), we see no warning signs that house prices are likely to decline UK-wide,” J.P. Morgan said.

“We are more bearish on London and see scope for double-digit price declines, although even under this scenario we expect relatively modest earnings impact.”

The broker said it continues to view dividends as highly sustainable and sees an average of 15% upside to price targets.

J.P. Morgan upgraded Persimmon to ‘overweight’ from ‘underweight’, to “reflect both our view that dividends could still beat, and a preference for balance sheet strength and ex-London”.

In contrast it downgraded Countryside Properties to ‘neutral’ from ‘overweight’ as a "relative call after a period of strong performance".

Canaccord Genuity has raised its rating on Restaurant Group to ‘buy’ from ‘hold’ and lifted its target price to 550p from 276p.

The broker said the upgrade on the owner of Garfunkels follows the replacement of chief executive Danny Breithaupt with Andy McCue, former chief of Paddy Power. The ousting of the CEO comes after a string of profit wanrings and a share price collapse.

“New CEO Andy McCue was CEO of Paddy Power where he embedded a new growth strategy which delivered record revenues and profits, as well as playing a main role in the merger with Betfair,” Canaccord said.

Canaccord said the executive team has also been strengthened by the appointment of Barry Nightingale as chief financial officer and Spencer Ayers as new managing director for its Frankie & Benny’s business.

Looking ahead to the company’s strategic review on 26 August, Canaccord said: “We highlight a checklist of actions that investors should expect to read in the review: exit poorly performing sites, continue to develop the brand portfolio, reposition Frankie & Benny's, reduce and re-direct capex, improve digital marketing capability, reduce the overheads, review returns to shareholders including share buybacks.”

Canaccord said the problems Restaurant Group faces are “not unique” but believes that the business is “fixable”.

“Maturing brands inevitably require constant innovation and occasional reinvention and there are many positive case studies in the market that suggest it can be done.”

Barclays downgraded Cobham to ‘equalweight’ from ‘overweight’ saying it expects several unquantifiable bumps along the way in the next six months and sees cleaner yet equally compelling value to be had elsewhere in its coverage.

The bank said that while the logic behind rebalancing away from defence was sound at the time, commercial markets have softened significantly since then, while pure-play defence peers have re-rated to all-time highs.

It said the rights issue further dented sentiment and in turn valuation multiples, meaning the stock still looks cheap, but the the impending management change cannot be ignored in the near term.

“We remain compelled by Cobham’s valuation, this is still the highest margin defence company on the planet trading at just 12.6x FY16E P/E, with a 4.8% dividend yield and a free cash flow of yield of around 7%, yet it trades at a P/E discount of around 30% to comparable US defence peers. Clearly the risk/reward looks to be skewed to the upside on a 12 month view,” the bank said.

Barclays said that while management remains cautiously optimistic in the company just about attaining the second half plan, this is unlikely to be sufficient to see that valuation gap close materially more than it has already as around 30% of revenues are exposed to non-aerospace and defence ‘commercial’ end markets, offering a lesser degree of safety than the pure-play defence peers.

“With the balance sheet now addressed the underlying story at Cobham should be a cleaner one. Should management be able to deliver their revised guide, confidence will slowly be restored in this 16% margin, highly cash generative technology business with high barriers to entry.”

Barclays maintained its 183p price target on Cobham.