Berenberg hails solid foundation at Travis Perkins, upgrades to buy
Analysts at Berenberg upgraded their recommendation on Travis Perkins, hailing the builders merchant's decision to invest in a heavyside distribution network.
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It was the only firm in its space that did so, meaning it had the best supply chain management in the industry with a best-in-class customer proposition, they said.
The German broker upped its recommendation on the stock to 'Buy' lifting its target price to 1,800p in the process.
The anlaysts said they were 2% ahead of consensus for 2017 and 2018.
Of interest, they pointed to the experience of the firm's US peers, early adopters of supply chain best practices which "provide evidence that margins and returns should improve over time".
Lease-adjusted return on capital employed should grow by 255 basis points by 2021, Berenberg said, reaching 13.5%.
Travis Perkins was also in the midst of revamping its IT to support its multichannel offering, helping to achieve both scale and best-of.breed fulfillment for competitive differentiation.
"We forecast that online sales will reach £145m in 2021E (5% of sales) at General Merchanting; we believe this is conservative and not in consensus forecasts," they pointed out.
The 'self-help' story in the company's ailing Plumbing and Heating and Consumer arms was also intact, with a review already underway in the former, Berenberg explained.
However, in Consumer management needed to accelerate investment were LAROCE was over 25%.
Berenberg also added the shares to its high-conviction list of ALPHA stocks.
From a valuation standpoint, Travis Perkins was trading on 11.4 times' Berenberg's estimate for the outfit's 2018 earnings per share, which was towards the bottom end of the P/E range between 2013 and 2017 of 10.6 to 15.9.
The shares were also at a roughly 11% discount to rivals in the sector.
"Down by 8% since the full year results due to the mixed outlook statement, 2017 may be a tough year due to cost pressures from inflation, but this is well known and in our numbers. We believe our assumption for volumes (-1%) is conservative in the context of the pent-up demand in the RMI market but visibility for 2017 remains low."