Broker tips: Rotork, Crest Nicholson, Barclays

Jefferies maintained Rotork’s rating at ‘underperform’ on Monday but raised its target price to 170p from 155p based on a higher 2017 forecast for the British manufacturer.

“Markets are difficult and this is unlikely to change soon, there is pricing pressure, margins/returns are under pressure and management still seem reticent to be tough on costs,” Jefferies said.

The broker said its forecast for earnings per share (EPS) in 2016 move down to 8.90p from 9.10p but 2017 moves up to 9.40p from 9.30p due to foreign exchange tailwinds.

Rotork’s first half was in line with the consensus forecast but below Jefferies expectations. Pre-tax profit and EPS fell after a period of tough trading and a drop in margins.

Jefferies believes Rotork faces a tough second half and full year 2017, given recent oil price declines.

“FX and acquisitions are tailwinds and there will be additional cost savings, but the risk of deferrals, falling order intake and further pricing pressure, along with the significant operational gearing that is inherent in the business concerns us,” Jefferies said.

“We are happy to reiterate our Underperform recommendation in this note. We understand the risks attached to this stance, but do not believe that Rotork will be acquired and although there is an FX tailwind developing (Rotork's competitive position is also improving due to FX), we believe there are risks attached to our forecasts and we need a lot of convincing before we contemplate a more positive stance.”

Crest Nicholson shares gained on Monday as UBS initiated its coverage of the housebuilder with a ‘buy’ rating and target price of 485p.

UBS said the stock was an “attractive risk-reward” in an uncertain outlook for the sector following Britain’s vote to leave the European Union.

“We initiate coverage on Crest Nicholson with a ‘buy’ rating based on three key reasons: (1) An attractive dividend yield of 7.5% for calendar year 2017; (2) Adjusted return on capital employed is one of the strongest in the sector at 21.4% for 2015 and (3) compelling valuation with the stock trading at 8.5x price to earnings ratio 2017 and 1.3x premium to net asset value,” the bank said.

“In light of our expectation for a slower housing cycle in the next 2 years, we believe the support from Help-to-Buy, which accounts for 30% of volumes, largely offsets concerns of having 10% revenue exposure to London and 50% apartment content.”

UBS said Crest is the highest dividend payer among mid-cap housebuilders. The company has a “progressive dividend policy” and is committed to lowering earnings per share (EPS)/dividend per share (DPS) cover to 2.0 x by full year 2017 from 2.5 x in 2015.

The bank expects Crest's EPS to fall 28% in 2017 but the DPS to be raised to 30p from 27.6p a year earlier.

“We see Crest well positioned to quickly turn net cash positive as land buying slows, resulting in a comfortable 2.1x dividend cover on a free cash flow basis,” UBS said.

“It should thus generate an attractive dividend yield of 7.5% for 2017, differentiating itself from other mid-cap peers.”

Barclays got a boost on Monday after Exane BNP Paribas upgraded the stock to ‘outperform’ from ‘neutral’ as it took a look at UK banks.

Exane pointed out that having been cautious on the stock for two years, it “made the mistake” of upgrading the recommendation shortly before the UK’s vote to leave the European Union, downgrading it back to ‘neutral’ again afterwards as it awaited more certainty on the economic outlook.

Exane said Barclays’ core first-half pre-tax profit was 10% ahead of consensus thanks to better pre-provision profit.

In addition, it said the bank provided comfort on both the capital outlook and access to the EU financial services market.

“Taken together, this has reignited our view that the bank could call all of its expensive preference shares over the next year adding over 10% to core earnings. Attention should then turn to other expensive capital securities that depress earnings by another 15%. This will help to offset other sector wide pressures.”

Exane maintained its ‘neutral’ ratings on RBS and HSBC, with Lloyds and Standard Chartered kept at ‘underperform’.

It said the banks’ first-half numbers “threw up few surprises with the focus therefore on outlook statements”.

“With the sector appearing to face a combination of slowing loan growth, lower margins and higher impairment, our sizeable EPS cuts post the vote to leave the EU look - at this early stage – to be justified.”