Broker tips: Rolls Royce, Drax Group, Morrison, Tesco

Shares in engineering giant Rolls-Royce slid after Exane BNP Paribas slashed its price target on the stock to 685p from 840p to reflect an additional pullback in the civil aerospace margin and further pressure on shorter-cycle activities.

Exane said Rolls, which it rates at ‘neutral’, has been the worst performer in the sector over 12 months, but the arrivals of Warren East as CEO and an activist fund on the the share register have revived hopes of turnaround.

The bank said communication and transparency have started to improve, attracting interest from value investors tempted to capture the potential of a large, young installed base that should turn cash generative over time.

However, Exane sees short-term downside risk to cyclical activities which account for up to 46% of sales, on which the company is likely to comment in its interim management statement on 12 November.

As the "power price crunch" worsens, Deutsche Bank has downgraded power company Drax Group from 'hold' to 'sell'.

The investment bank said on Tuesday that capacity concerns have been in the spotlight, with National Grid's notice of insufficient system margin (NISM) signalling a tightening UK power market.

However, the pressure on Drax's earnings and cashflows is likely to rise due to weakening gas prices, and more LNG exports from the US will to the pressure.

With the rally in the share price over the last month and drop in UK power prices, Deutsche Bank said it is concerned about potential downside scenarios.

Tesco and Morrison were under pressure after Deutsche Bank downgraded the stocks as it took a look at the UK food retail sector.

The bank resumed its coverage of Tesco following a period of restriction, cutting the stock to ‘hold’ from ‘buy’ and chopping the target price to 210p from 240p.

“Our conclusions suggest that there is limited upside to sector profitability and that Tesco’s historical margin premium will narrow,” the bank said.

It added that net proceeds from the disposal of the South Korea business were less than it had factored into its sum-of-the-parts.

Deutsche downgraded Morrison to ‘sell’ from ‘hold’ and cut the price target to 155p from 180p saying the company had the right balance sheet but the wrong competitors.

The bank said Morrison has the greatest customer overlap with the discounters and Asda, due partially to its geographical exposure and its customer demographic.