Broker tips: Reckitt, Haleon, Persimmon, Serco
Morgan Stanley upgraded Reckitt Benckiser and downgraded Haleon on Friday as it took a look at consumer staples stocks.
The bank lifted Reckitt to ‘overweight’ from ‘equalweight’ and upped the price target to 5,500p from 4,600p, saying it was its new "top pick" in home and personal care (HPC).
Morgan Stanley said that after several years of earnings volatility, it expects Reckitt to deliver mid single digit percentage like-for-like growth and high single digit earnings per share growth from 2025, supported by the company's ongoing buyback programme, placing it at the top quartile of EU Staples peers.
"Additionally, the potential sale of the company's Essential Home business later in the year could support further re-rating and capital return," it said.
"We acknowledge risks around the ongoing litigation, but argue that is priced in at current levels, leaving the risk/reward positively skewed."
The bank downgraded Haleon to ‘equalweight’ from ‘overweight’ but lifted the price target to 410p from 400p.
It said it continues to consider Haleon a core long-term holding owing to its well positioned portfolio in attractive categories.
"However, after a year of significant outperformance, with shares now trading at a 25% premium to EU Staples, we await a better opportunity to add," Morgan Stanley said.
Elsewhere, UBS upgraded Persimmon to ‘buy’ from ‘neutral’ as it said the valuation was now more compelling.
It said that key will likely be how quickly affordability improves through lower mortgage rates.
"We expect Persimmon's shares to re-rate as it delivers site growth and margin recovery," UBS said.
The bank said the stock now discounts a too bearish scenario. It noted that Persimmon's shares are down 33% since October and trade at 1x 2025E P/TNAV (long-term average 1.6x and near a historic trough) and only price in circa 15% adjusted long-term return on capital employed, versus its estimate of 20% and a 28% average since 2000.
"We think liquidation value of the land bank is around 1,460p (over +35% upside). We now model a more cautious earnings outlook for Persimmon reflecting recent company commentary and macro conditions (mainly higher swap rates), but think that is more than priced-in."
UBS said Persimmon will likely work through a vast majority of fire safety provisions over 2025/26, which should enable more cash flow optionality thereafter.
The bank said it thinks EBIT margins have troughed at around 14% in 2023/24E and can gradually improve but only models a 20 basis points increase to 14.3% in 2025 with a margin recovery path to 20% by 2030, well below peak levels of 27-31% in 2017-22.
Serco was downgraded by Jefferies from 'buy' to 'hold', as it cited headwinds to earnings momentum.
The broker downgraded the stock and slashed its target price for the shares from 225p to 175p, indicating just 13% upside from Thursday's closing price of 155.1p.
"While we continue to like the underlying end market positioning at Serco and see value in the US defence business, nearer-term earnings and FCF momentum looks more muted, with headwinds in Serco's largest contracts unhelpful," Jefferies said.
"As a result, despite attractive valuation, any further re-rating may take time."
According to Jefferies' estimates, Serco is expected to see no profit growth over 2024 to 2026. This is partly a result of the recently announced loss of a £165m Australian immigration detention centres contract, predicted reductions in UK immigration, and lower estimated contract revenues with Centers for Medicare and Medicaid Services in the US.
Then there's the additional headwind from higher national insurance payments in the UK following changes in the autumn Budget, which the company said will increase labour costs by £20m a year.
Upside risks for the stock include potential further share repurchases, and an estimated £500m in surplus capital which could be used for M&A over the next 12 months, the broker said.