Broker tips: Redrow, St.James's Place

Berenberg has cut its rating for housebuilder Redrow from 'buy' to 'hold' following the company's announced merger with Barratt Developments.

Under the terms of the deal announced last month, Redrow shareholders will get 1.44 Barratt shares for each Redrow share. At the time, Barratt's share price was 530p with the offer for Redrow at 763p per share, implying 1.2 times tangible net asset value (TNAV).

"However, with the recent decline in Barratt’s share price the offer for Redrow now stands at 688p per share (implying a 1.1x TNAV)," Berenberg said.

"Given our view that the merger will complete as planned and reflecting the current Barratt share price, we update our price target and rating for Redrow."

The broker has lifted its target price for Redrow from 643p to 688p, implying very little upside from the current price, down 1.3% at 658.5p by 0914 GMT.

RBC Capital Markets downgraded St James’s Place on Friday to ‘sector perform’ from ‘outperform’ and slashed the price target to 500p from 900p.

The bank said news of a £426m complaints provision has added further uncertainty to an investment case that was already complicated by anticipated declining earnings over FY24-FY26.

"Whilst the share price response (down 30% post results) and current valuation (7.3x FY25E P/E) bake in a pessimistic view on the group's prospects, we now expect clarity over risks (and unwind of observed discount) to develop over a multi-year horizon," it said.

"On a 12-month view there is scope for further mixed news flow. The tricky asset gathering backdrop, uncertainty around the flow of complaints and potential exit from the FTSE 100 are notable risks (all outside of the new CEO's control), whilst we believe the outcome of a strategic review at H1 results could be received positively."

RBC said that with the shares now trading at a 33% discount to peer average on FY25E P/E basis, simplistically the market is now arguably implicitly pricing in a circa 48% EPS dilution event.

"Whilst the company hasn't given any indication of a need for capital injection, we see future risks in this respect as increased following the historical advice delivery matter, where it is impossible to rule out future provision strengthening.

"We note that whilst the group is extremely well capitalised, the liquidity position centrally appears more constrained, with a £295m available revolving credit facility acting as a buffer."

RBC said patience now looks likely to be key to performance.