Broker tips: Centrica, Travis Perkins, Reckitt Benckiser

RBC said it advocates Centrica’s strategy, announced last July, to put customers at the centre of growth ambitions and to scale back exploration and production (E&P) exposure.

The broker said a 33% increase in oil prices over the past three months will drive improved economics in E&P and generation for Centrica, pushing earnings before interest and tax 10-20% higher than previously.

“Now that commodity prices have started to bounce and Centrica’s new growth strategy is taking shape with recent acquisitions, we reiterate our ‘outperform’ recommendation with a new price target of 250p pre share (down from 280), reflecting the recent equity raise.”

The company’s raised £700m in May, which was a surprise that was poorly received by the market, RBC noted.

“While we understand strategic growth acquisitions may be difficult to pass up, we believe credit metrics were really driving the equity raise. And it worked.”

RBC added that Centrica "screens well" against integrated peers, trading on an estimated 2017 price to earnings ratio of 11.5x, a 5-10% discount. The group also has a dividend yield of 5.7% in 2016, which RBC said it believes will grow in line with operating cash flows at 3-5% out to 2020.

Berenberg downgraded builders’ merchant and home improvement retailer Travis Perkins to ‘hold’ from ‘buy’ and slashed the price target to 1,540p from 2,300p pointing to effect of Brexit uncertainty on the housing market.

“While we still believe that Travis has a sound long-term strategy, we are unable to maintain our Buy rating in light of the risks to UK construction activity resulting from the Brexit vote,” the bank said.

It does not expect to see a scenario similar to 2008-2009 but reckoned a moderate contraction in activity was likely, meaning the group will be unable to achieve its mid-term growth ambitions.

“We believe that the recovery in residential construction output that started in late 2009 is likely to be at an end after the vote by the UK to leave the EU,” said Berenberg, pointing out the market was already slowing ahead of the referendum.

Its base case is for a 10% drop in housing starts in 2017 and a 5% contraction in residential renovation.

Berenberg argued that a decline in consumer confidence and house prices could dent home improvement spending, which, unlike in 2009 onwards, does not have the cushion of a steep reduction in mortgage rates to support discretionary spending power.

The bank cut its earnings per share estimates for 2017 and 2018 by around 31% and advised investors to wait for potential political clarity in the autumn, by which time negotiations for the UK’s exit from the EU might have kicked off.

Analysts at JP Morgan downgraded their recommendation on shares of Reckitt Benckiser, arguing that the boycott on its goods in South Korea would weigh on the group´s rate of growth in like-for-like sales.

To take note of, the broker shifted its stance following a strong run in the stock price over the intervening ten months, during which time the company´s shares widened their premium versus its global peers.

Indeed, the team of analysts led by Celine Pannuti said it still believed in the consumer goods giant´s "strong business fundamentals".

In particular, the analysts noted the 360 basis point step-up in the company´s margins since 2013.

Nevertheless, underlying momentum was expected to take a hit, with growth in like-for-likes slowing to 4.0%, limiting earnings upside.

"Barring any M&A, a further relative re-rating to the peer group may be difficult to achieve. We downgrade to Neutral [from 'overweight'] and move to the sideline for a better entry point," they said.

JP Morgan also set an end-2017 target price of 7,000p, versus its previous December 2016 target price of 7,150p.