Broker tips: Travis Perkins, Drax

Barclays upgraded builders' merchant Travis Perkins to 'equalweight' from 'underweight' on Tuesday, saying the risks are now fairly valued.

The bank pointed out that the shares are more than 50% off their peak and earnings have been revised down by around 45%.

"Although there remain uncertainties around economic activity in the UK and the company's own positioning and strategy, we think the valuation, which is close to trough levels, now reflects the risks."

Barclays said the key factor in coming months - aside from Brexit - will be the group's strategy update.

"Paradoxically, the positive surprise of third quarter trading being better than feared may make it more likely the revised strategy is less radical, which could underwhelm the market," it said.

Barclays has a 1,150p price target on Travis Perkins.

Analysts at Jefferies downgraded Drax from 'buy' to 'hold' on Tuesday, stating it was "unconvinced" the recent growth in the electrical power generation outfit's share price would continue.

Although Jefferies noted that Drax's recently announced acquisition of 2.6GW of Scottish Power's hydro and gas power plants would be "highly EPS accretive and diversify the business", the broker also saw integration risks and now expects earnings of new assets to step down in 2022.

The broker said it felt the £702m deal should help Drax become a major provider of dispatchable power but felt the deal didn't appear to be "an obvious bargain" compared with valuations of listed generators and transaction multiples.

While Drax expects an EBITDA of £90-110m from its new assets in 2019, but the broker thinks earnings will fall in 2022 as capacity market revenues fall by 50%.

Jefferies also noted that earnings of new assets would likely come under pressure from growing competition in the system support market.

Looking forward, the broker stated the benefits of future EU policy reforms seemed to be largely priced-in and also highlighted the recent UK budget as being another potential downside risk to Britain's carbon levy of £18 per tonne after March 2021.

Jefferies kept its 400p target price on Drax unchanged.