Credit Suisse upgrades Ferguson, expects dividend restart

Credit Suisse upgraded its recommendation for shares of Ferguson and hiked its target price, pointing out the various positives in its equity story and arguing that even under its 'grey sky' scenario, the plumbing and heating products distributor's earnings were set to be more stable than in 2008-09.

"We view Ferguson as a high-quality, growth stock in the long term, with scope for a re-rating relative to its US peers," analyst Emily Biddulph said in a research note in which she assumed coverage of the shares.

Indeed, the target price might be higher still, she said, were it not for the "overhang" of an uncertain short-term outlook.

"A meaningful recession through 2021 would lead to a c.25% further reduction to our new estimates," she explained.

As well, market volatility could push out the date for a stock market listing Stateside and cap any near-term re-rating in the shares.

In its favour on the other hand, the company supplied "essential" products, its exposure to new build was less than during the Great Financial Crisis and it was now in a position to finance taking market share, instead of losing it.

As an aside, Biddulph put the peak-to-trough organic volume decline by the end of the 2021 financial year at roughly 7%.

She also saw "scope for a quick return to dividend payments", labelling the decision to axe the interim payout "very conservative".

For 2020, she was penciling in a final dividend of $1.18, with net debt at the end of the year pegged at $1.5bn or just 0.9 times earnings before interest, taxes, depreciation and amortisation versus total facilities of roughly $4.0bn.

For all of the above reasons, the analyst upgraded the stock from 'underperform' to 'neutral' and marked up her target price from 4,740.0p to 6,181.0p.