Berenberg upgrades Marshalls to buy, raises target price to 510p

Berenberg initiated coverage on Marshalls in May with a 'hold' rating, saying that although it "appreciated" the group's high returns, resilient growth and the prospects for further acquisitive growth and cash returns, it felt the valuation was "demanding" given the difficult climate in the UK for the repairs, market and improvement (RMI) market.

However, Marshalls's outperformance in the domestic market, plus the acquisition of CPM, led Berenberg to up its recommendation and to up its target price from 420p to 510p.

Marshalls's domestic business outgrew the underlying market by 12% in its first half of trading, with Berenberg saying it believed the outperformance was likely to continue to be driven by strong upselling of higher margin products, an increased number of homeowners investing in their properties, and a heightened use of the pension withdrawal scheme over the coming half.

Going forward, Berenberg said, "Along with being 9%-accretive to operating profit initially, we believe the group will be able to extract revenue synergies from the cross-selling of Marshalls' surface drainage kerbs and CPM's underground storage. We also believe further acquisitions are likely after integration of CPM is complete given the group’s strategy as part of its 2020 plan to further expand in water management, eg treatment, street furniture and mineral products."

Within the construction sector as a whole, Berenberg saw only two other British companies that had greater upside than Marshalls's 12%, reiterating its 'buy' ratings on Ibstock and Kingspan projecting upside of 32% and 13%, respectively.

"Overall, we remain positive about new build residential construction, neutral on RMI activity and negative on non-residential construction. In terms of stocks, we upgrade Marshalls to Buy (from Hold) and maintain our Buy recommendations on Ibstock, Forterra and Kingspan. We remain holders of Grafton and SIG."

As of 1515 GMT, Marshalls shares had gained 1.50% to 459.70p.