Broker tips: Computacenter, Rentokill, Melrose Industries
Analysts at Berenberg hiked their target price on computer services provider Computacenter from 1,700p to 2,450p on Friday, stating its conviction was at all-time highs.
Berenberg said in this environment it was rare to find a company that delivers numbers higher than analysts had been forecasting at the beginning of the year and rarer still was one that trades on just a 19x price-to-earnings ratio and delivers a roughly 7% free cash flow yield.
"How Computacenter trades on a 30% discount to European resellers is beyond us," said the analysts.
The German bank, which reiterated its 'buy' rating on the stock, stated Computacenter was one of "the most compelling investment cases" in its universe and also highlighted that its earnings estimates may still be 20% too low.
"Feedback from channel checks indicates that the key to the company's outperformance is its distribution, logistics capabilities and customer mix," said Berenberg.
"With circa £280m of net cash, not only are we confident the company will reinstate its dividend but we also think that the likelihood of a cash return is rising."
In the analysts' view, investors could generate a total shareholder return of around 45% over the course of 12 months, given its new price target, dividends and a possible tender offer.
Analysts at Deutsche Bank hiked their target price for shares of Rentokil Initial, highlighting the potentially "substantial" uplift to the company's disinfection services arm in the second quarter from the Covid-19 pandemic.
Although the latter was hard to quantify, analyst Lucas Ferghani said the firm was well-placed to benefit by cross-selling to existing clients.
Furthermore, DB noted that rivals such as Clorox had seen demand for disinfection products roughly quintuple during the Covid-19 pandemic and Nielsen and Google trends data also pointed to a enormous, roughly half of the above, jump in US sales of aerosol disinfectants throughout March and April.
Residential pest control was also expected to have grown, boosted by work from home.
On the downside, DB said pest control was expected to be down double digits in the second quarter, although demand from food processors, grocery and healthcare should offer some support, Ferghani said.
The Hygiene unit was also expected to underperform, in line with facility services and workwear peers.
There were also some downside risks to Rentokil's margins because of the hit from the pandemic to higher margin geographies, including Europe, UK, Pacific and Northeast US.
Lastly, the analyst said, efforts to retain staff in anticipation of an eventual recovery "might result in higher drop through than expected by the market."
Deutsche raised its target price on the firm from 390.0p to 500.0p.
Analysts at Barclays lowered their estimates for Melrose Industries but kept their recommendation for the shares, telling clients that a recovery in its automotive segment in 2021 might result in "upside surprises".
Following the turnaround specialist's trading update the day before, Barclays cut its forecast for 2020 earnings before interest, taxes and amortisation at the aerospace unit by 46% to £199m with a 26:74 split between the two halves of the year.
Furthermore, the anticipated return to profit in 2021 was expected to be underpinned by cost savings while year-on-year top-line growth was expected to remain "minimal".
For the company's automotive and powder metallurgical arm, on the other hand, Barclays estimated that organic sales were set to rise 11% in 2021.
Cost out actions were expected to support the bottom line further so that 2021 group EBITA was seen down by a more modest 11% to £592m.
Most important, however, the broker's analysts said that their base GLVP growth forecast of 16% for 2021 meant that there was scope for upside surprises.
Barclays kept its recommendation on Melrose Industries's shares at 'overweight' with a target price of 155.0p.