Broker tips: Shell, Cranswick, WH Smith, Travis Perkins

Barclays downgraded Shell to ‘underweight’ from ‘equal-weight’ on Wednesday, saying that while the company has the potential to deliver significant fresh cash flow in the long term, it screens as expensive relative to its near-term industrial performance.

"A strategy presentation in February 2021 may well act as a catalyst but is still five months away, and we see limited momentum until then," Barclays said, adding that BP is its preferred UK stock while Total remains its ‘top pick’ in Europe.

It noted that Shell was one of the first to take action amid the weaker macroeconomic backdrop, choosing to cut its dividend by two-thirds. "We continue to see that as having been the right decision for the long term, but it also raised a number of strategic questions that remain.

"Industrially, the strategy remains unchanged - and our own forecasts project a material uplift in FCF in 2022 and 2023 - to by far the highest level of the sector. Yet the capital allocation strategy and how this FCF may be used does need further explanation to us."

In particular, Barclays said Shell’s medium-term capex outlook remains a key uncertainty, as well as its willingness to do M&A, the speed of the transition to renewables and ultimately what the dividend profile will look like over time.

"These are important questions that we believe the company can and will address, but until those firm answers are provided we believe they are likely to act as an overhang on the shares."

Analysts at Berenberg raised their target price on food manufacturer Cranswick on Wednesday from 3,850.0p to 4,000.0p, stating that even further growth was possible following the group's "exceptional period".

Berenberg highlighted that Cranswick’s first-quarter update confirmed that it had made "an excellent start to the year", recording 19% organic revenue growth.

Although the German bank said it expects the rate of expansion to temper from here on in, it still estimates "substantial growth" will be delivered in the 2020/21 full-year.

Berenberg also noted that while it believes investment will be needed for expansion to continue in future years, it feels the company has the balance sheet strength to accommodate this.

"The company has considerable balance sheet capacity, with bank net debt/EBITDA below 1.0x and more than £100.0m of unutilised debt facilities, providing plenty of headroom to make such investments," said the analysts, who reiterated their 'buy' rating on the stock.

Goldman Sachs initiated coverage of WH Smith at ‘buy’ with a 1,500.0p price target as it said the stock offers industry-leading returns at a discount.

"Our positive view is based on a gradual improvement in traffic (across air, rail and UK high street) and a constructive long-term view on profitability, resulting in a strong returns forecast versus peers, which we reflect in our multiples-based valuation framework," it said.

Goldman expects travel sales growth to outpace High Street sales growth and anticipates a circa 10 percentage point top-line substitution over the next four years. "Hence we expect a shift away from a competitive high street towards a more captive customer in travel, driving long-term upside to already best-in-class profitability," it said.

The bank said that on its estimates, these returns are not captured in current valuations.

In the near term, Goldman reckons the company is close to the bottom of its earnings revision cycle post the Covid impact and said it sees potential consensus upgrades as a positive catalyst for the share price.

Analysts at RBC Capital Markets raised their target price on builders' merchant Travis Perkins from 1,000.0p to 1,250.0p on Wednesday, stating some improving trends and cost actions had made it slightly less cautious of the stock.

"The DIY trend has benefited through lockdown, the public are getting used to spending money on homes rather than travel and hospitality, and the stamp duty changes, the Green agenda and a commitment to infrastructure spending should all be helpful drivers," said RBC.

However, while RBC said short-term trading would be helped by the rebound from lockdowns and a strong DIY market, the Canadian bank also said it was cognisant of a weak macro and employment picture going into 2021 and, as a result, lowered its 2021-22 revenue and earnings forecasts.

"Clearly the outlook for the UK economy is not pretty from an employment and GDP perspective, especially as furloughs come off, and clearly this could impact the end consumer and RMI market," said the analysts.

RBC thinks Travis Perkins is "well placed" but, in the meantime, said it struggled to justify enough upside to be positive and reiterated its 'sector perform' rating on the stock.