Broker tips: Wolseley, DFS Furniture

Liberum upgraded heating and plumbing products distributor Wolseley to ‘buy’ from ‘hold’ and bumped up the price target to 5,300p from 4,975p.

The brokerage said Wolseley is becoming more refined as it reduces European exposure, exiting Nordics in full and Switzerland in part, taking US profits to 90% of the group.

"US growth is likely to step up as headwinds fade. It is likely to restart capital returns with the proceeds of the Nordics sale," it said, adding that US business Ferguson's bigger share of the group should drive re-rating.

Liberum pointed out that Ferguson continues to outperform. It is still the undisputed market leader, has a long track record of market share gains through distribution centres, and is building on this by moving into adjacent categories and exploiting e-commerce.

In addition, it highlighted a broadly positive US outlook, with fundamental drivers intact. The US peer group is seeing improving trading, Liberum said, with reports from peers reminding it that Ferguson tends to outperform its peers, and that trading has recently been strengthening.

Analysts at Berenberg cut their target price for shares of DFS Furniture due to the risk that the soft UK environment might extend into the company's 2018 fiscal year.

That followed the retailer's recent profit warning on the back of weak trading over Easter and the May bank holiday, which it linked to uncertainty around the general elections and warm weather.

Yet stock in the retailer was most closely correlated with consumer confidence and that had remained steady, Berenberg said.

Hence, Berenberg believed it was difficult to determine just how long that weakness would last.

"Management sees no reason, at this stage, to warn against consensus expectations for 2018, believing that some market weakness was already expected [...] however, the forward-looking consumer confidence survey suggests that caution is warranted," they said.

Barclays reiterated its 'overweight' recommendation on shares of Drax the day after the company announced its new dividend policy.

Its analysts said they could understand investors being slightky disappointed that the company had not provided more specific and formulaic guidance.

However, its increasingly low risk earnings mix, high cash generation, strong profit guidance and scope for high returns made the stock a compelling proposition for investors.

The broker anticipated Drax would be able to grow its ordinary dividend by 8.4% per annum until 2025, in-line with its average growth in operating profits (EBITDA).

On top of that, the analysts expected a further £75.0m-worth of divis in 2018 and £150.0m per year from 2019 onwards, with the latter most likely taking the form of special payouts.