Broker tips: Wolseley, Tate&Lyle, Bovis Homes

JPMorgan Cazenove upgraded building materials distributor Wolseley to 'overweight' from 'neutral' and lifted the price target to 5,600p from 4,960p pointing to scope for US earnings upside and a structural case for multiple expansion.

JPM noted that versus its universe, the stock has underperformed by 5-10% year-to-date. "Without factoring in any upside from US tax or infrastructure policies, we can see scope for around 15% upside to earnings, aided by inflation, sustained end market growth and bolt-ons."

The bank said there is a strong argument that even without the upgrade potential, an increasing proportion of earnings from the US and reduced exposure to new build versus previous peak should drive sustained multiple expansion.

Analysts at Numis hailed Tate&Lyle's full-year results for the latest fiscal year, bumping up their target price from 849p to 882p in the process, even as they cautioned about the potential negative impact the renegotiation of NAFTA might have.

They also upgraded their recommendation on the shares from 'hold' to 'add'.

In the company's latest financial year, profits before tax jumped 40.4% to £271m boosted by a foreign-exchange tailwind.

Numis pegged the improvement in the firm's underlying results at 17.6%, adding that "there are still issues" but said it saw some upside scope and highlighted the dividend yield on offer.

Net debt relative to operating profits stood at only 0.9, which might stand the company in good stead if it needed to pursue M&A in order to meet its goal of securing 70% of its EBIT by financial year 2019/2020 from speciality food ingredients, in comparison to 54% last year, Numis said.

The analysts also saw scope to continue reducing net debt given how capital expenditures would be muted in the near-term.

Analysts at Deutsche Bank upgraded their recommendation on Bovis Homes from 'hold' to 'buy' on expectations that the company would succeed in improving its returns on capital and what they believed was potential significant upside to its dividend policy.

Deutsche Bank also revised its target price on the stock higher, from 980.0p to 1,135.0p.

In their opinion, the homebuilder´s land bank suggested 3 percentage point upside potential to gross margins, which together with actions to cut overhead costs could drive its operating margins back towards 20%, the sector average.

Bovis was also capable of moving back to 4,000 completions "relatively quickly".

Together, those measures could result in 30% upside versus the broker's forecasts for fiscal year 2018 operating profits, which implied returns on capital employed moving quickly above 20%.